Tesla is one of the most valuable automakers and has also become one of the most valuable companies in the world. The accomplishments of this company come from its aggressive push to promote electric vehicles and advancements in battery storage devices. It has become an increasingly popular option for investors seeking to capitalize on the innovative and disruptive technologies driving the future of the automobile industry and accessible clean energy solutions. This how-to article serves as a definitive guide to investing in Tesla.
A Guide to Investing in Tesla: What You Need to Know
Step 1: Understand Tesla Stock and Tesla Bonds Options
Most companies such as Tesla use two instruments to raise capital from the public. These are stock and bonds. You can choose either of the two or both depending on your investment goals and objectives. Tesla stock is for more aggressive investors with higher risk tolerance while Tesla bonds are more suitable for moderate to conservative investors with lower risk tolerance.
Keep in mind that Tesla positions itself as a tech company although its financials are similar to most automakers. The stock that it issues can be considered a large-cap stock and a growth stock with several features similar to other cyclical stocks. Investing in Tesla stock means adhering to the principles of growth investing while also taking note of the cyclical performance of automakers and other companies in the consumer discretionary sector.
Tesla also issues several types of bonds. It commonly issues convertible bonds that can be converted into shares of stock. Note that non-investment grade albeit high-growth companies use convertible bonds to raise funds. The company also has a history of issuing non-convertible and callable bonds. Its non-convertible and callable bonds are considered unsecured bonds because they are not tied to a specific asset and are only backed by its full faith and credit.
It also issues bonds tied to leases on its electric vehicles or lease-backed debt. These are secured bonds. The leases represent assets that can be transferred to the bondholder in case the company defaults or if it ceases to exist for whatever reason. Earnings from this lease are essentially transferrable to the bondholder in case of default.
Step 2: Know Your Investment Purpose and Risk Profile
There are several reasons to invest and benefits to investing. These include outpacing inflation and building or preserving wealth. However, not all investments are created the same. It is important for an individual to ask himself or herself first pertinent questions aimed at determining his or her investment goals and objectives and risk tolerance.
Investing in Tesla can be part of an overall goal of long-term capital accumulation or medium-term to short-term capital gains. Those who are seeking long-term growth for future big-ticket expenses or retirement preparation are better off investing in Tesla stock and adding it to their portfolio of stocks while those who are seeking medium-term to short-term gains can either trade its stock and bonds or buy and hold Tesla bonds until maturity.
Note that stocks have pros and cons. It also has risks. Tesla stock has more cons and risks. These include the volatility of its price, high beta, cyclical nature based on its historical performance, and threats and issues unique to the company such as uncertainties in the supply chain, threats from competition, and regulatory issues. Tesla stock is suitable for aggressive investors with higher risk tolerance and would not mind swings in its stock price.
Those who are moderate to conservative investors with lower risk tolerance are more suitable for bonds. Bonds still have risks and disadvantages. These include credit or default risk, market uncertainties, interest rate and inflation risks, and liquidity risks. The performance of bonds in the long term is also not as good compared to the long-term performance of stocks.
Step 3: Choose Between Direct Investing and Passive Investing
Part of investing in Tesla is knowing how and where to purchase its stock and bonds. There are two general options available: either direct investing or indirect investing. Direct investing entails buying stock and bonds from registered brokers. Indirect investing involves investing in Tesla stock and bonds through firms that offer pooled fund investments.
Direct investing in Tesla will specifically require you to find a broker and open an account. Some of the most popular stock brokers in the United States include Vanguard, Fidelity, Robinhood, eToro, Charles Schwab, and Interactive Brokers, among others. Take note that Fidelity, Charles Schwab, Vanguard, and Interactive Brokers also offer bonds. Other notable bond brokers include TD Ameritrade, TradeStation, and Magnifi.
On the other hand, when it comes to indirect investing, this involves choosing among the different types of pooled funds. These include mutual funds, unit investment trusts, exchange-traded funds, and unit-linked insurance plans. There are also different types of funds within each pooled fund. These include equity fund that includes stocks of top companies, and mixed or balanced funds that include a mix between equities, bonds, and other instruments.
Choosing between direct and indirect investing also means determining how much money you are willing to invest in Tesla. You must weigh the pros and cons of each to determine the best option that is aligned with your investment purpose and risk profile. Indirect investing is often more affordable but direct investing gives you better control over your investment decision.
Investing in Tesla in a Nutshell: Important Reminders
Tesla offers stock and bonds. You can invest directly via a broker or indirectly via providers of pooled funds. Take note that you can invest in both to diversify your overall investment portfolio. However, if funding is an issue and you have to choose either of the options, remember to choose the option that is best aligned with your investment purpose and risk profile.
Investing in Tesla also requires doing your due diligence. This involves saying informed about its financials and growth prospects or business strategies, knowing market trends which include relevant competitive forces and situational factors, and understanding different risk factors that can affect the company and your investment.
Nevertheless, it is also important to underscore the fact that Tesla is not your only option. Remember to diversify your portfolio. Look for other companies and other types of assets and securities. Always monitor your investment and make relevant adjustments as needed. It is crucial to do your research and seek the advice of a financial advisor.