How to invest in Spotify from the UK

About this company

Spotify Technology is a Swedish company whose product is the well-known music player application that bears the same name of the company: Spotify. Launched in 2008, the application has become one of the most widely used, accumulating more than 340 million users worldwide.

From the beginning, Spotify was presented as a multiplatform application that was available for Windows, Mac Os, Linux, Symbian, IOS and Android. With this, Spotify was guaranteed a fast diffusion among music lovers as they could have the application always with them, both on computers and cell phones.

Spotify offers its users more than 35 million song titles that they can listen to as on the radio via streaming. And it also offers users the possibility of using the application for free or subscribing to the premium service.

The difference is that the free accounts have some limitations, in addition to having advertising between songs. Unlike the premium ones that do not have any limitations or advertising.

In this way, Spotify generates money with both types of account because with the free account it obtains income from advertising while with the premium accounts it obtains income from subscriptions. Being the subscriptions its main business and major source of income as it has more than 155 million users who pay the subscription.

In its business model, the company keeps 30% of the revenues while the remaining 70% is distributed among the artists. This is based on a formula that distributes the money in relation to the number of plays accumulated by each singer.

It went public only on April 3, 2018, so its history listed on the New York Stock Exchange is quite short. However, this has come to offer a return of more than 200% between highs and lows making it an ideal stock for those who know how to take advantage of volatility.

In general, Spotify is a company with a great future given the segment to which it is dedicated, music. This is a sector that grows and adapts on its own and Spotify is only the medium through which it is disseminated, remaining completely outside of what happens in the music industry. And although so far it does not pay dividends, it is not ruled out that in the future it will do so.

What are the assets you can trade?

Index Funds

If a long-term investment sounds like something you would do, and you won't need to take back your money in five or ten years, index funds can be the best choice. This type of investment is also great for beginners since it is more secure. Besides, the variety is wider.

You may think differently, but beating the benchmark is far from being a piece of cake and very few fund managers have done it, apart from some specific cases, like Warren Buffett's.

In practice, all that glitters is not gold: if a fund manager achieves to beat the benchmark, it is only for a short period or on a specific occasion. Or perhaps they would charge very high rates and indexing would be a better decision (with minimal commissions).

Index funds offer these two great benefits: most of the time, they beat active managers in the long term, and the commissions are lower than you imagine.

Foreign exchange market

Forex or currency trading allows obtaining profits by converting one currency for another.

If you decide to exchange EUR and USD, you acquire euros and pay with dollars, with the expectation that after buying the first currency (the euro) it will revalue compared to the second (the dollar), to make a profit by selling it. Let's say you entered when a euro is worth 1.10 USD and you close when it reaches 1.15: consequently, you will gain that margin.

Perhaps you already deducted this, but this kind of trading usually implies large resources, since variations tend to be low, or using a lot of leverage, which is a bit like skating on thin ice. If you are just starting to trade, it is not a good idea to begin with the currency market, because it's not the safest option.

Most currencies are available on this broker. Nevertheless, take into consideration that in this market sales are made through contract for differences, thus the underlying asset won't be yours.

How do Contracts for Difference function?

If you already have been on this broker, you probably noticed that the initials CFD appear frequently. We will come back to it, but first, you should know that cryptocurrency operations on this broker are only CFDs if you are short-selling or leverage above x2 (but this is not even available on the platform).

For the record, and in case you are interested in day trading cryptocurrency and other advanced practices, you will also meet concepts such as going short and leverage.

With CFDs you can bet on this broker even if you are “in red” or don't have a positive balance. For example: you believe that the Spotify will fall, so perhaps you think that it is better to wait until it does and then go in. But if it actually falls, you can make some profits out of that.

You can accomplish that by “going short”. Basically, it functions like this:

  • Someone lends you, let's say, 100 units of Spotify, valued at a total of $ 5,000 (these are completely fictional figures)
  • You sell the 100 units and earn $ 5,000
  • The Spotify goes from $ 50 to $ 30 (as you predicted, it devaluates)
  • You obtain the 100 units again, but their total current value is now $ 3,000
  • Now you return the 100 units to whoever loaned them to you
  • The difference is yours, so, you will have earned $ 2000

It all sounds more complicated than it really is. Just keep in mind that by trading in Spotify on this broker, with CFDs you can make a profit if you foretell downs in the price.

How does leverage work

Do you know what leverage is? We'll put it simply: trading allows you to invest even more than what you really have. That is, if you have $ 100 and you use x2 leverage, you will be really investing $ 200.

Leverage and the importance of “Take Profit” and “Stop Loss”

Let's pretend that you are confident that Spotify will raise its price, and you consider “going long, but you only have $ 1,000 available. However, it is possible to put more and get higher profits.

There's the possibility of asking for a credit, but you must know that all the process takes time, and by the moment you finally get the money, Spotify might be already so expensive that investing wouldn't be convenient anymore.

Thanks to leverage, you can get that amount of money really easily. It's exactly like borrowing money, but much better: from the broker itself. You will be able to operate with much more money than you actually have on the the broker wallet. As in the image below, you will see the different options you have:

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Trading with other assets allows you to use even more leverage. The reason: cryptocurrencies usually represent medium-long term investments, and leverage is used mostly for short-term operations or day trading. Let's talk a bit more about how leverage works.

If for your investment of $ 1,000, you use leverage x2, your investment is 2 * $ 1,000, that is to say, $ 2,000. The broker gives you the remaining amount to reach that figure.

A couple of days pass and turns out that you were right: Spotify price has risen by 20% and your money has appreciated reaching $ 2,400. But you don't want to take too much risk, so it's time to sell back.

First of all, the 1k $ of the leverage will be deducted. You have $ 1,400 left, of which $ 1000 is the money you invested yourself, so you'll have earned $ 400.

By starting with $ 1000 and getting $ 400, you'll be earning 40% of your investment.

The trick is that the risk of losing out also increases. If everything goes as you planned, you will earn profits in little time; but if the opposite happens, you will also lose more really quickly.

For instance: if the price falls by 10%, you do not lose $ 10, but twice (the leverage) that figure, that would be $ 20. Therefore, when using leverage it is fundamental to know other two terms: Take Profit and Stop Loss.

Take Profit is used as a form of reducing risks when trading. When you enter, you can set a profit limit and ask that your position is automatically closed when the asset reaches a price. 

If you purchased Spotify shares at $ 100, you can ask your broker to close once it reaches $ 120. That way, you make sure you won't be blinded by greed and decide to wait a bit longer in case it keeps rising, which could be a mistake since the price could go down again really fast.

Stop Loss is even more necessary, mostly if you use leverage, since a reduced loss with leverage can have a significant impact. For that reason, it is vital to set a Stop Loss more tight than that suggested by the platform.