As one of the largest software companies in the world, Microsoft can feel ubiquitous. And even though Microsoft is already a global company, it’s still able to post strong growth in personal computers, electronics, software and cloud services. Here’s what to consider about the merits, risks and rewards of buying Microsoft stock.
1. Learn about the fundamentals of Microsoft stock
You may be familiar with Microsoft as a customer. Even so, revisiting a company with fresh eyes as a potential investor can help you evaluate whether, how much and when to invest.
Annual and quarterly reports offer insight into a company’s operations, financial results, sources of income and expenses. Investors can also evaluate Microsoft’s merits based on characteristics such as:
Competitive analysis: How does Microsoft size up against its competitors such as Apple, Meta, Intel, Google and Amazon?
Dividend yield rate: The value of Microsoft dividends relative to its stock price.
Earnings: A measure of net income, showing the profitability of a company.
Price-to-earnings ratio (called a PE ratio): How Microsoft’s stock price compares with its earnings per share (called EPS).
Revenue: The value of Microsoft’s goods and services sold during a period.
Microsoft has outperformed the S&P 500 over the past five years under the leadership of Chairman and CEO Satya Nadella. Analysis by financial experts at Morningstar rate Microsoft as undervalued as of June 1, 2022. (Morningstar is a NerdWallet partner.)
2. Consider Microsoft in the context of your investment plan
Just because you can buy something doesn’t mean you should. Whether to buy Microsoft stock is a question of your financial goals, timeline and the other assets in your portfolio.
Before you begin, check in on your cash reserves. Do you have three to six months of living expenses set aside for an emergency? Do you have any high-interest debt, such as credit card debt, you’re trying to pay off? If you’ve checked the boxes above, you may be ready for the next step.
Thoughtful investing involves diversification and proper asset allocation. As a general rule of thumb, individual stocks should make up no more than 10% of your financial portfolio.
Consider: What types of assets do you have in your portfolio? And how many tech stocks do you currently own? Look into the index funds you own to see if any of them contain Microsoft and decide if you want additional exposure by investing in Microsoft directly.
3. Know your investment timeline
Time is an important factor in your investment plan. Take into consideration whether you may need the money you’re using to buy Microsoft stock for a more immediate need, such as a home purchase or college tuition.
If you’re investing in the stock market, it’s best to consider it a long-term investment. If you won’t need the cash for, say, five years, you can weather any stock market turmoil that may occur in that period. But if you’ll need that cash for short-term goals, consider options like high yield savings, bond funds or money market accounts.
The dollar-cost averaging approach is an investing strategy in which investors regularly invest over time. While they’ll inevitably buy while prices are high, they’ll also buy when prices are low, averaging out the risk faced in the market.
4. Open a brokerage account if you don’t have one
The process of opening a brokerage account takes around 15 minutes and resembles the process of opening a checking or savings account. Once you have deposited money in the account (often by linking to a bank account), you can begin to buy stock.
When choosing a brokerage, evaluate it on a range of factors such as customer service, investing tools, research, resources and commissions. Online brokers and robo-advisors offer a range of services that suffice for most investors, including retirement and taxable brokerage accounts. Robo-advisors are often a lower-cost option compared with a (human) managed brokerage account.