Investing in Tesla Stock (TSLA): Things You Need to Know Before Investing

August 10, 2021

Investing in Tesla can be an extremely tempting idea. Many investors can get swept up in the buzz surrounding the company that comes from the innovative nature of their products, and their well-known, yet enigmatic CEO, Elon Musk. But sadly, that does not make a thorough investment case. 

Investing is done with the idea of growing money as quickly as possible, with the least amount of risk. Does Tesla truly offer that possibility? And if so, what are the other factors that make it an interesting potential investment? Or, on the flip side, what factors are risky to invest in? 

The Electric Car Market

It is essential to look at the wider electric car market within which Tesla sits before deciding whether to invest in it or not. For, while Tesla is arguably the most well-known electric car on the market - is it the only one? For starters, hybrid cars are increasingly popular, and while they are not fully electric, they can offer a product that can detract from the 100% electric car industry. Plus, there are growing numbers of older car makers producing electric cars. For example, Hyundai, Volkswagen, Ford, and Porsche - to name just a few - all make electric vehicles that could well challenge Tesla as the electric car brand to buy. 

That being said, the fact that Tesla is the most well-known electric car manufacturer is a big bonus and plus point for an investment. Having a strong brand name helps make sales. Sales mean more profits. And profits are what help improve stock prices. Having a strong brand is one of the best intangible assets a company can ever have, and Tesla already has that in spades. 

Macroeconomic Factors That Help or Hinder Tesla

In addition to the industry influences that can affect the upside of an investment in Tesla, it is also essential to keep an eye on the larger macroeconomic factors. For, make no mistake, the proliferation of electric cars out there will only increase as Governments around the world look to minimize carbon emissions. And, that means that more and more manufacturers are entering the race to get the best electric car engine out. Doing so is a way that companies can set themselves apart from their peers and be the go-to company from which to buy an electric car. 

That being said, while the potential to be pushed from a good position by other manufacturers is always a risk, there are other macroeconomic factors to take on board too. Namely, population growth. The population of the world is set to grow and grow for both the near and distant future. As a result, more cars and vehicles will be needed. That means an investor can almost count on the demand for electric cars. That should always act as a support for Tesla stock prices, as the want for electric vehicles looks to skyrocket. 

Tesla’s Company-Specific Information

Finally, both industry and macroeconomic factors should be considered alongside company-specific information too. There is no ignoring the fact that Tesla is run by one of the world’s most famous CEOs. Elon Musk is currently residing as the world’s richest man, and he has garnered a huge platform to work from as a result. It means that what he says or does is never ignored. In fact, quite the opposite, where he goes, other people follow. So, when he invests in something, others do - and vice versa. You only have to look at the effect a couple of his negative tweets surrounding Bitcoin had on Bitcoin’s price to see the power he can hold. 

Other company-specific factors include the motivation behind the company too. Elon Musk has often stated that his motivation behind running Tesla is not to make money. Instead, it is to innovate in such a way that the world is helped. Whether you believe that or not, it does make Tesla an interesting company to at least follow in terms of investment. For, when not motivated or driven by profit margins, it can both act as a detractor to performance as well as a great driving force. 

Also Read: Why Women Should Invest More

Finally, the fact that Tesla is a household name can also act as a drag on performance as well as a booster of it. Retail investors like to invest in names they know. Retail investors know Tesla and are therefore likely to take positions in it. That can artificially inflate or deflate prices as retail customers are less likely to carry out pricing models on a firm. It also makes it more prone to volatility. That being said, retail investors are not necessarily wrong - they just tend to invest differently to institutional investors. 

Investing in Tesla: Key Takeaways

Investing in Tesla is something that many of us may be tempted to do given the innovations that come out of the company. However, before making any investment, it is imperative to weigh up the downside and upside potential in relation to your own portfolio as well as your risk profile. Plus, investing only what you can afford to lose is often a good mantra to follow as all investments - exciting such as they are at times like Tesla. For, all investments can go both up as well as down. 

Remember that your risk profile is your ability to withstand risk as well as your want to take it on too. For, you may be happy to buy what is seen as a risky investment, yet the size of your portfolio may mean that you are not in a position to make many losses. Or, it could be that you do not wish to take on much risk, even though you have a sizable portfolio with a healthy market value. As a result, you need to ensure, if you are going to buy Tesla, that it is appropriate for you and also means that the subsequent asset allocation of your portfolio still meets the needs that your risk profile demands. 

Rachel Lee
Having worked at Morgan Stanley and BNYMellon for over 10 years in pensions and investments, Rachel now works as a full-time business and financial writer.

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