TMCnet Feature
January 20, 2021

What you need to know before investing in tech stocks

You’ve probably heard stories about people who bought some stocks in a tech company on a whim, many years ago, and now they’re living the good life somewhere in a tropical paradise. Whether they are just urban legends or real-life events, it’s hard to tell, but one thing’s for sure: the tech industry was and continues to be a tempting playground for investors all over the world.

If you’re someone who has caught the investing bug, you might be wondering if you should jump on the bandwagon and invest in tech stocks. There are definitely plenty of reasons to do so, as the tech sector is huge and getting bigger, meaning it provides countless opportunities for above-average returns and can help you diversify your investment portfolio. But as is the case with all types of investments, it’s not all rainbows and butterflies, and there are also drawbacks to take into account.

You wouldn’t want to enter the world of tech stock investing blindfolded, without doing a bit of research first. This is not an area where you can rely on beginner’s luck or simply trust your instinct. If you want to put your money to work, get results and minimize risks, you’ve got to understand how things work in this sector. So, let’s take a look at some of the most important facts about investing in tech stocks.

Why people invest in tech stocks 

Before we answer this question, let’s make sure everyone understands what we mean when talking about tech stocks. To put it simply, tech stocks are shares in companies operating in the technology industry. This is a vast field, where both tech giants and start-ups compete in a variety of sub-sectors such as Information technology (IT), Artificial intelligence (AI), streaming, telecommunications, hardware, software, consumer electronics and so on.

It can’t be denied that technology has revolutionized our world, and experts agree that future tech breakthroughs will be even more impressive than what we’ve seen so far, bringing further improvements to our lives. This makes it easy to understand why the biggest companies in the S&P 500 come from the tech sector. Tech companies are viewed as solid and reliable businesses that generate steady revenue. It seems that not even the coronavirus pandemic has managed to throw the tech sector off balance, reinforcing the idea that tech stocks are a profitable investment.

Most attractive tech sub-sectors for investors

As we’ve already mentioned, the tech industry comprises many sub-sectors, each of them providing opportunities for those who want to invest in tech stocks, so investors can have their pick and easily diversify their portfolios. However, there are certain areas that seem to be more profitable than others, and that’s where most investors direct their attention and money. Here are the sub-sectors that attract a large number of investors.

  • Artificial Intelligence – AI is without a doubt one of the most promising tech sectors out there, as it has experienced significant growth in recent years. As AI applications will make their way into every aspect of our lives, it’s worth keeping an eye on stocks from companies such as VMWare or Splunk (News - Alert)
  • Information Technology – a life without information technology to help us store, retrieve, transmit, and manipulate data or information is almost unimaginable. That’s why companies like Cisco, IBM or Microsoft (News - Alert) are thriving.
  • Streaming – nowadays entertainment and technology are inseparable, and the success of streaming companies Netflix and Roku stand proof of that.
  • Semiconductor Technology – since this is the sector in charge of manufacturing all the components used in electronic devices, it’s no surprise companies like Intel (News - Alert) or Broadcom attract a lot of money and investors.
  • Transportation – tech and transportation go hand in hand, with the advent of electric cars putting companies like Tesla in the spotlight. 

Popular tech stocks at the moment

There’s a certain group of tech companies that has investors fighting over their stocks. Experts refer to it as FAANG, from the initials of the companies it comprises: Facebook (News - Alert), Amazon, Apple, Netflix, and Google. Stocks from these companies are at the top of investor’s preferences for good reasons: they’re large players that have shown constant and significant financial growth over the years. However, these are not the only stocks that are doing great on the market. Companies like Nvidia, Twilio (News - Alert), Zoom and other big names also draw large numbers of investors.

The pros of investing in tech stocks

Some of the biggest benefits of investing in tech stocks are pretty obvious. For starters, there are many blue-chips stocks available from companies like Facebook, Google and fiends that guarantee a good return. Apart from that, if you’re interested in utdelningsaktier, the tech industry also offers opportunities for these types of investments, so you have the possibility to build a steady income stream. What’s more, investing in tech also gives you the chance to diversify your portfolio, since you can buy stocks from companies operating in different sectors such as telecommunications, tech hardware, software etc.

The cons of investing in tech stocks

There’s no such thing as a risk-free investment, and tech stocks make no exception. Growing concerns over tech companies’ regulations can have a negative impact on tech stocks and increase their volatility. Also, the complexities of the industry and the emerging technologies make it hard for investors to have a solid grasp on tech companies. Investing in something you don’t fully understand is not the ideal scenario. Not to mention that the high price of stocks from large companies represent an insurmountable barrier for most first-time investors.

Tips for first-time tech stock investors

The only way to become a savvy investor is to start practicing. But theoretical learning will surely help. Before you make an investment, you have to assess the stocks you’re interested in.

If you come across a company that has high prices-to-earnings ratio, this might happen because the company is expected to experience rapid growth in the future. Another way to evaluate a fast-growing company is to compare the price of the stocks to the company’s income. It’s also a good idea to pay attention to the company’s revenue growth, meaning you have to see how the company’s income has evolved year after year. As a rule of thumb, if you want to choose good tech companies for stock investing, you have to focus your attention on those sectors that are predicted to grow faster in the future (AI and IoT might be the safest bets). 

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