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How to invest in e-commerce stocks and companies

How to invest in e-commerce stocks and companies

I remember the very first time someone spoke to me about e-commerce. The question was unexpected and it caught me off-guard. I consider myself somewhat knowledgeable so I did not especially like the fact that I was not sure what my colleague was talking about. She asked, “what do you think the future of e-commerce looks like?” Trying to act like I knew exactly what she was talking about I said, “well you know these things. Who knows?” To cut a very long and embarrassing story short, I kicked myself when I found that it is something I do daily. So for the sake of any naïf who might be at the stage I was in back then I will begin by explaining plainly what e-commerce is. 

E-commerce is basically the term given to financial transactions that take place online. Sounds pretty simple and basic right? Every time you buy or sell something online you have effectively engaged in e-commerce. Since the very first online transaction way back in 1994 e-commerce has grown exponentially. Market experts say that the sector is in fact growing by 23 percent each and every year. Projections indicate that this year alone sales as a result of e-commerce are expected to go up to 27…wait for it…trillion! This number applies only to retail so you can already imagine what the complete analysis of every sector would look like.

It is perhaps these impressive numbers that are making investors flock to e-commerce. It is a lot of money changing hands daily and the beauty of it is that it can only grow. The internet is here to stay and the world is even more determined now to go cashless. People want the convenience that comes with e-commerce capabilities. As an investor you probably want to get into some of this action. It is very important for any investor to understand what they are getting into. Knowing and understanding the dos and don’ts of the e-commerce industry is vital if you are going to invest wisely and successfully. In this section of the article I will give you a brief guide so that you are not completely in the dark.

We know what e-commerce is so we can move to the next step. What types of e-commerce sites exist out there? To answer this question fully you need first to know the three ways that e-commerce websites can be classified. They are:

By what they sell whether products or services

According to the businesses they engage with

Based on the platform upon which they operate

E-commerce based on products or services

When we talk about what a store sells we can further break that down into three categories. First, you have the kind which sells actual physical goods. Most retails fall in this category. So a store that sells ladies’ merchandise, sportswear or perfumes will be categorized in this cluster. How it works is the shopper will be able to look at items online, choose what they need, add it to a virtual shopping cart and checkout or pay once done. When the virtual part of the transaction is done the store typically delivers the item to the shopper.

The second lot are the ones that do not sell products. They sell services. A freelancer is a perfect example in this category. If someone needs a writing job done they will look for a freelance writer who does the work for them, sends it to them, then once done is paid virtually. In some instances, the payment is required upfront. Different websites that deal with this kind of work handle transactions differently. The third and final category is digital products sellers. E-commerce is completely based on the web so it is only sensible that some products sold in this way are digital. Books, for example, do not have to be paper back anymore. New novel out? No problem just look for the digital version of it and you are sorted. There is a course online for everything you can think of. You want a book on how to be a good investor? I guarantee you that you will be spoilt for choice. These are examples of digital products.

The type of people who take part in e-commerce are important when classifying e-commerce sites. Some of these parties include:

1. Business to business transactions (B2B)

2. Business to customer transactions (B2C)

3. Consumer to business transactions (C2B)

4. Consumer to government transactions (C2G)

5. Business to government transactions (B2G)

6. Government to business transactions (G2B)

7. Consumer to consumer transactions (C2C)

How to invest in e-commerce stocks

One thing is certain; if there is one sector that has rewarded investors quite handsomely it is the e-commerce sector. Returns for investors who chose the right stocks have been phenomenal to say the list. This trajectory is set to only go higher because more and more people prefer to buy goods and services online through online payment methods. Everything right down to the food we eat is available with just a few button clicks. 

To the unseasoned eye investing in e-commerce might seem plain and unappealing. Most investors usually prefer to invest in nascent sectors which sound futuristic and smart like virtual reality, artificial intelligence and the like. The emerging truth, however, is that e-commerce is the best investment option anyone can go for now. To put it plainly, the factors driving this sector are basic, necessary and permanent. Convenience is becoming a more and more important aspect of transactions and this is why e-commerce wins. E-commerce companies are also striving to provide seamless delivery services to clients and the response is more online shopping.

So why e-commerce? Well for starters there is still a lot of opportunity for further growth in the sector. With retail projections for this year alone running into the trillions, it is without question that e-commerce is likely to get more lucrative for investors. Secondly, the e-commerce sector has been growing consistently over the years with no plunge whatsoever in returns. Consumers are also getting more comfortable with online shopping and payments. These will have a positive effect on the returns for investors.

Any investor worth their salt will ask a pertinent question when approached to invest in e-commerce stock companies; what is the risk involved? If for nothing else, you should always ask this question to protect your money. There is no investment that comes without risks. This is just part of the leaning curve when asking how to invest in e-commerce stocks. The probability of losing in one way or another always exists no matter how good the deal is. One thing that is apparent is that traditional retailers (read brick and motor stores) are upping their game. By lowering their shipping rates and improving on speed of delivery they are giving online only retailers a run for their money. Online stores realize less profits than traditional stores. I know it may seem like not having to pay rent or staff salaries cuts cost considerably but the online world comes with its own costs. Marketing, shipping and product handling costs can be quite a headache. The huge number of competitors online also makes the prices plummet as store owners grapple to get the clients. That is for the store owners and online retailers. As an investor the biggest challenge you will face getting on board this train is the extremely inflated cost of the stocks. Companies know that there is room for growth in the industry which is already seeing more sales. Stocks are priced with their future value in mind. What this means for the investor is that a recession would be deadly and brutal.

How to analyse stocks in e-commerce

Like with any other investment opportunity there is some due diligence to be done. Before investing you have to find the right e-commerce company. There are metrics that as a serious investor you simply have to consider. For e-commerce these are:

- Profit margins

- Growth of revenue

- Gross merchandise sales

Profit margins for e-commerce can sometimes be low. The most important thing for you as an investor is to look out for signs of profitability for your investment. A good indicator would be the amount of money spent on marketing efforts. During phases of quick growth, most e-commerce companies make the mistake of overspending on marketing and this reduces their profits even further. Measured spending if employed would result in more profitability.

The revenue growth of an e-commerce company is very important. This is a sector that has been growing steadily by no less than 15% every year. A good e-commerce company should have stocks that grow by at least 20%. There is a good reason for this. A company with stocks growing at a higher percentage than the industry shows that it is outdoing the industry itself and can potentially grow even further. So do not look at how much profit the e-commerce company is making. Rather consider how quickly their revenue is growing.

The gross merchandise sales or volume refers to the total number of sales made on an e-commerce company’s platform. This for many investors is a key indicator of a company with good stocks because it cannot be manipulated easily. You get to see the true performance graph of any company by looking at their GMS.

Risks and benefits of investing in high growth e-commerce companies

In any type of investment or business venture two probabilities exist; that you will fall prey to the risks involved or benefit greatly by realizing good profit. Undoubtedly therefore, you should expect the same when it comes to e-commerce stocks. There is simply put – no guarantee of reaping grand returns (even though this remains highly probable). For most investors who venture into e-commerce stocks, they prefer to go all in i.e. invest in a wide range of different e-commerce company stocks. The logic behind this type of investing is that the diversification allows the investor to mitigate their risk. A simplistic way of looking at it is that if for example they are ten stocks from different companies, a few might plummet but definitely not all. Profit is likely to be realized in one or two at the very least. 

This said it might be prudent to mention that this type of investment is best suited to investors with a very high-risk tolerance. Such investors are able to ride the waves of this investment option and manoeuvre them in a way that benefits them. We have looked at how risky it can be to place your bet on high growth e-commerce companies. Let us now look at what you stand to gain as an e-commerce stocks investor. Why is it, after all is said and done, a good idea to go into one the largest and fastest-growing markets in investment history? 

a) A great source of passive income

For most people, a salary simply isn’t enough anymore. The cost of living is high everywhere and with more luxury items hitting the market, cash in hand from employment or a day job is never sufficient. E-commerce stocks offer you the opportunity to earn some money on the side. Chances of becoming successful with e-commerce stocks are very high too especially if you go about your investment decision wisely. You can use the money you earn as dividends to buy more e-commerce stocks. This increases your income stream without you have to quit your day job. Sure you will need to do some research to find out which companies have high growth stocks and consult with a market expert. This is minimal work compared to what you stand to gain.

b) The opportunity to reap huge returns in the coming years

The e-commerce sector has been growing slowly but steadily since its inception. Analysts whose job it is to study and observe trends predict that this steady rise is set to happen faster and higher in coming years. Getting in the game now is a sure way to have an advantage when this happens. If you are already investing in high growth company stocks even at a small scale now, you can begin to use your dividends to buy more stock and to diversify so that your income streams are many and guaranteed. The B2C (business to market) industry in the UK is the third-largest in the world with 9 % of the population being internet users. At a population that was 66.44 million in 2017, investing in the e-commerce sector in the UK is definitely a good idea. Consumers are turning more and more to the conveniences of online retail and this is what drives the numbers up.

c) You get to take advantage of certain specific statistics and trends which exist in the e-commerce climate. The most prominent are:   

- Various methods of payment

Quite unsurprisingly the most preferred methods of payment in the UK right now are debit and credit cards. In 2018, a whopping 52 per cent was already opting to use these for payment as compared to earlier years where cash dominated. The research that determined the 2018 statistics did not even place cash second. It is online payments such as PayPal that closely followed card payments. This shows you just how beneficial it would be to join the e-commerce stocks bandwagon right away.

- Purchases made across borders

Cross border trade is one of the factors that make e-commerce stocks very appealing. As a potential investor, it is important to understand how exactly it is you can benefit from your investment. In the UK market, purchases that occur within the country borders account for 74% of the revenue. The EU market total 15% while those from without the EU come to about 11%. Export sales to the United States from the UK is an impressive $ 60 billion while those to Germany are $ 47 billion. With such numbers, investors can tap into high growth e-commerce companies and benefit greatly. all you have to do is ensure that you understand risks and benefits of e-commerce investment

Finding the right e-commerce stocks to invest in

Online shopping has been with us now for quite a while. When I talk about online shopping I may be referring to e-commerce (depending on how purchases have been executed) or not. The two are obviously related but are not exactly the same thing as we have discussed in earlier sections of this article. Now one can easily say that online shopping is well on its way in most parts of the world. E-commerce is however just revving up its engine. Last year alone the total expenditure by consumers totalled a jaw-dropping $3.5 trillion. This is an astonishing 18 % growth if you look at previous years’ numbers. In view of these revolutionary figures it is easy to understand why investing in e-commerce stocks has become a phenomenon taking a life of its own. 

Buying e-commerce stocks means taking your money and betting on an investment vehicle with it. If you do not care too much about losing money then there is no need to take caution about the ‘vehicle’ of choice. I have never met an investor who doesn’t care about their money – it is the reason they are investing it in the first place. To avoid losing money investors have to get down to a rigorous task which involves;

- Coming up with a list of potential e-commerce companies that have exhibited high growth

- Doing due diligence to find out all you can about the stocks on your list. Are the companies worth the gamble?

- Making a choice after narrowing down to a few choices on which stocks might bring in the most profit for you

Most investors, especially those who are relatively new to this type of venture usually undergo several losses before realizing that aside from market uncertainty, the above three reasons are the cause of their woes. I usually like to compartmentalize everything you should consider into 5 very compact points. These are:

1. What does the e-commerce company deal in exactly?

2. What is the price: earnings ratio of the said company?

3. What type of dividends has the company been issuing since it began operations?

4. Check out stock price fluctuations of the company

5. Evaluate risk involved compared to the market by looking at the beta

Let us begin by looking at company business. No matter how thrilling it is, it is never a good idea to go out on a date with a complete stranger. What if they turned out to be a serial killer or worse? Find out, before buying stocks, what exactly a company does, what processes are involved, how clients pay and all other important factors. Whatever you cannot tell from preliminary research find out online. Peruse the website and talk to people you would confide in about your investment. They are likely to have questions and you only know everything about a company if you can put to rest all questions.

The P: E ratio is the other factor to consider when trying to figure out whether or not an e-commerce company is high growth or not. There is a very interesting analogy that investment experts use to explain this concept, especially to first-time e-commerce stock investors. See if you wanted someone to invest your money for you, of course, you would consider at least two experts. So consider that one might be extremely seasoned and with a brilliant track record. This experienced one tells you they will take 40 per cent of what he makes you and leave you with 60 per cent. Now consider the second investment expert who perhaps is just starting out. He or she has absolutely zero references but offers you a juicier deal; 80 per cent for you and 20 for them. Who do you go with? Simply put, if a company has a P:E ratio of 40 it means that investors such as yourself are willing to pay £40 for every 1£ it gets as revenue. If you have the information in hand you can actually calculate the P: E all by yourself. You do this by taking the prevailing market price and comparing that value to the total earnings spanning the last four quarters. Even if the P:E turns out to be low but there is significantly fast growth you might want to consider those stocks.

Every time someone mentions the beta factor I think about mood swings. Funny I know but there is nothing more volatile I can liken it to because that is what it basically means; volatility. How volatile have the stocks you want to buy been? The beta will inform you quite comprehensively about the systemic risk you face buying that company’s stocks, especially when contrasted against other companies in the same market. Anything higher than 1 when it comes to beta is bad news and you should have quite a think before putting your money in the stocks. As an investor, you are therefore looking out for a beta of 1 or less. However, a beta of 1 or less may also mean something unappealing for some crop of investors; that the company stocks are relatively unreactive to the S&P 500. They are called defensive stocks. If you are the type of investor who is looking to make a killing in a very short period of time then this type of stocks are not for you. They allow you peace of mind; no constant monitoring and watching. The trade-off is slow returns.

The third factor that you should consider on our list is dividends. If you are a busy investor who does not exactly have the time to keep a close eye on your stocks then you should scrutinize the dividends of the companies you are considering investments with. The beauty of dividends is that they work almost like the interest you would earn on a savings account. Regardless of what the stock price is, the shareholders get paid their dividends. It is usually a certain percentage of the profits a company makes and it is paid to the shareholders as a gift. The amount is paid in cash and is decided on by a board of directors. If a company you are looking at investing with pays out dividends to investors then you are in luck because this basically guarantees you a steady income. There is a sense of security that comes with investing with a dividend-paying entity. An e-commerce company that is just teething may not have very good dividends though. Lastly, e-commerce companies like any other have charts showing how the stocks have been performing over the years. As a novice, you may not understand much from the charts so it may be wise to get an analyst to tell you exactly what they mean.

There is simply no shortcut when it comes to doing your homework. To find out how you stand to benefit and to sieve the good stocks from the ones you should avoid like the plague you must do the pre-work. In order to mitigate risk do not go for stocks that would get you returns in just a short time. Also, you might want to try stocks with good history among other investors.

Investing in e-commerce Pre - Initial public offerings

Like the name aptly suggests, an IPO (initial public offering) is the first offering of stock by a company to the public. Sounds like a mouthful I know but it really isn’t that complicated. As an investor, you simply cannot invest in a company. It is only once the company stock sare on the exchange market that you can buy them. If you know absolutely nothing about the investment you probably are wondering why a company would ever sell ‘bits and pieces’ of itself at all/ Well if as a company you want to grow and give your operations a boost then you probably will ‘go public’.

Sometimes the best way to go about investing is by going for pre-public offerings in e-commerce companies. In the pre-IPO period, the company stocks are basically held by employees or in certain cases other investors until they hit the stock market. The way that this would work is through pre-IPO placement. This means that private investors would get first pick so to speak. Such an investor would more often than not have a lot of investment to inject into the company stocks and they, therefore, get the stock sat a lesser price than those who buy the stocks after the company goes public. Any time you hear about a pre-IPO placement you should know one thing; the demand for the said stocks is extremely high. Now there are advantages associated with buying stocks before they are public. The first benefit is that there is potential to make a killing when the stocks end up being worth the investment. Secondly, as an investor, you may get to enjoy the crowdfunding opportunity that comes with buying e-commerce stocks before the respective company goes public. 

The toughest bit about this type of investment is getting information about them at the right time. An investor has to be extremely keen and diligent so as not to miss out. You can engage the services of an investment expert because they usually have their ears to the ground. News outlets and economic publications may also give hints about which stocks are available. While the returns from pre-IPO stocks may be good, there are risks involved. There is usually very little time to do any kind of thorough research in the company offering the stocks. You might, therefore, misjudge the future of such an entity. Most times there is asymmetry in the information received by interested investors. One might, however, posit that there is no investment that is complete without risk. In order to make any kind of profits from e-commerce stocks, you must be willing to take some form of risk. One thing is without question; the e-commerce sector is growing rapidly. Actually the more the internet and computers evolve, the more room we create for this industry and by extension more valuable stocks. It helps to read about and become accustomed to financial news and trends all over the world. This ensures that you are up to speed at all times about what is new in the e-commerce world. You also get to know what companies have the most valuable stocks for you to invest in.

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