Technology Stocks: A Guide on How to Invest in Them
By The Forex Review - 22 / March / 22 520
Dominick Bell
Technology influences everything that happens today. Technology is everywhere, from our smartphones and computers to advances in medical devices, satellites and cars. They are part of almost every sector. Therefore, it is only natural that a large number of investors consider technology stocks as a good investment. If you are also interested in this topic, then you have come to the right place!
What are technology stocks?
Technology stock is stock in a company that researches, develops, or produces products or services that use technology. Any company where most of its products and services are heavily influenced by technology can generally be called a technology company.
But here it should be noted that every year any business, no matter what it does, becomes more and more dependent on technology. For example, in 2019, McDonald's announced it was acquiring an artificial intelligence (AI) company to improve its services. Does that make McDonalds a technology company?
It is important to look at the final product or service that the company offers. Despite the amount of technology behind delivery, the Big Mac is still a hamburger!
A technology company's portfolio can range from microchip manufacturers and software vendors to artificial intelligence and biotechnology.
Technology companies include Apple, Amazon, Alphabet (owned by Google), Cisco, Intel, Microsoft, Netflix, Verizon, and many others. The diversity in this tech sector is huge and in practice, the right tech company can be found for every investor.
To date, it is the performance of technology stocks that is often the main indicator of the state of the economy and the stock market in the United States and around the world.
Types of technology companies
We have already noted a serious diversity of companies in the technology sector. To get a clearer picture of the different types of tech companies you can invest in, we'll roughly divide them into 5 broad categories that can complement each other:
- Software companies: This includes Microsoft. Today it is the largest software provider in the world. But there are a huge number of other players in this market, and they all essentially do the same thing - someone writes the code to create a product, and someone distributes it.
- Equipment manufacturers: it’s already much easier here, you can take the final product in your hands. It can be a computer, smartphone, printer, hard drive, modem, the list goes on for a very long time. Cisco is a great example of such a company.
- Microchip manufacturers: in fact, they are also engaged in the production of equipment and products can also be taken in hand, but this is rather the production of parts for the final, usually more complex product. Intel is the largest microchip company.
- Companies that provide us with information on the Internet. Any sites and social networks that you visit on a daily basis will be related to this item. For example: Google and Facebook.
- Telecommunications: Tech companies of this type provide us with internet connectivity. Examples of such companies are Verizon and AT&T.
Each investor chooses which technology companies to direct their capital to. However, it is recommended to distribute capital between companies of different types in order to diversify your portfolio.
Why invest in technology stocks?
Imagine that a man fell asleep in the early 90s and woke up today. The difference between the two worlds is huge, it will be difficult for this person to perceive the reality around him. At the same time, only three decades have passed, and it is technology that makes this difference.
Next generation technologies such as cloud computing, internet of things (IoT), artificial intelligence (AI), autonomous vehicles and others are already part of today's technological revolution. You must have come across some of them.
The reasons for investing in technology stocks are many - it can be anything from preserving and increasing capital to promoting innovation, but let's list the most popular ones. So, what do you get by investing in technology stocks?
- Invest in the fastest growing economic sector in the world
- Help and participation in the development of the most advanced technologies
- Opportunities for capital gains and achievement of financial goals
- Passive income opportunities in the form of dividends
- Opportunities for portfolio diversification
- Opportunities to save and multiply savings for a peaceful retirement
- Inflation Protection
- High liquidity as some technology stocks are among the most traded in the world.
We should also note the share of the technology sector in the broad US S&P 500 index, which includes 500 stocks with the largest market capitalization from 11 sectors of the economy. According to a study by siblingreserach.com, it is technology companies that have the largest share in the index - more than 28%.
The second largest sector in this index is the healthcare sector, and it has almost half the volume!
The tech sector is growing faster than the broader market, at least in recent years. And if we look even further, to the 90s of the last century, we will see that even then the technology sector was growing at an incredible pace.
Investing in technology stocks: what are the risks?
As with any other investment, there are risks involved. Here are the main ones:
- Abrupt changes in the technology market, such as the disappearance or replacement of some products with more modern ones.
- Very high stock price volatility compared to most other sectors.
- Companies in this sector are also overvalued compared to other sectors (i.e. higher price/earnings ratio)
For your safety, we have compiled a blacklist of brokers.
