Ready to learn more about investing in some of the most cutting edge companies in the world? Find out more about tech stocks, the benefits and risks of investing in them, and how you can get started.
Already a point of interest for many investors, some technology stocks saw even greater growth as a result of the COVID-19 pandemic of 2020 and 2021. Personal and professional habits shifted, as millions of people were forced to adapt to using digital tools. This widespread adoption saw some companies experience huge boosts in revenue, and, therefore, in the value of their technology shares.
With continual innovation and disruption the norm these days, the tech sector can be a great place to find rewarding investment opportunities. Are you ready to add some digital power to your portfolio? Read on to learn about what drives the tech industry, the benefits of investing in these stocks and what to look for when trying to find the best technology stocks.
What is the technology industry?
In terms of stock market trading, the technology industry includes companies involved in associated fields such as:
including devices, and the programs and systems run on them.
which is broadly the hardware and software that people use to communicate, such as mobile phone towers and cabling as well as Internet service providers.
including the companies responsible for researching and developing much of the hardware and software we use in our everyday lives.
which make products such as switches, modems and microchips.
Some people have different names for the various sub-sectors of the technology sector. With so many new products and services being invented and produced — accompanied by newly launched technology start-up stocks — comparing one tech company to another can be a bit like comparing apples to oranges. That is why some people prefer to concentrate on one of these smaller groupings as opposed to tech stocks overall.
What is driving the technology sector?
We all know technology progresses at warp speed. Not only are new versions of existing technology released — whether they are faster, more powerful or simply more affordable — but also new needs arise, making devices and their technology obsolete.
Think of the major technological revolutions we have seen in the last 50 years alone — the rise of desktop and laptop computers, the creation of mobile phones and the evolution of smartphones, the e-commerce boom and online connectivity and capability as a whole, to name just a few.
And it does not look as if that progress is slowing down. Here are a few factors helping to push global tech stocks forward:
The need for high-speed connectivity for personal and professional use could drive the sector for years to come. Right now, the focus for many is on 5G technology, and all the cabling and other infrastructure it requires. But with millions of people around the world lacking high-speed connectivity, alternative options such as satellite connectivity could create an entirely new avenue of growth for the sector.
Industry 4.0, the Fourth Industrial Revolution we live in today, continues to evolve. Innovators are creating new ways of using AI, machine learning, data collection and modelling power to disrupt everything from saving the environment to providing healthcare, not to mention harnessing the power of data and selling information for marketing and product development purposes.
That Fourth Industrial Revolution we just mentioned has helped give birth to something called Software-as-a-Service (SaaS), which enables more people to use a software product via the cloud. It means instant, easy access and has been a huge driver behind the rise of software companies and their stocks.
As mentioned above, COVID-19 has transformed the e-commerce landscape. The pandemic forced many businesses to accelerate their e-commerce timelines, accomplishing in the span of a few months what was planned to take years. Millions of online shoppers started making digital purchases more frequently, while hundreds of thousands of households shopped online for the first time.
What are the benefits of investing in tech stocks?
There are many reasons why adding technology stocks to your portfolio can be a good idea.
They have business models that can be easy to understand. While the technology itself might be complicated, the biggest companies make much of their money off hardware such as mobile phones and computers, subscriptions or advertising.
Tech companies can experience long periods of growth. Think about some of the biggest companies in tech, and how long they have been market leaders. Their names have become synonymous with innovation.
These innovative businesses will often expand into other industries — like Google did with mobile phones.
Tech stocks can become blue chip stocks. While the sector can be quite volatile because technology changes so quickly, those companies that can consistently innovate and disrupt can eventually offer buybacks and dividends.
They are part of a digital revolution that might never end. Digital progress and reliance show no signs of stopping, which means there will be plenty of time to keep creating and improving products.
You can go with what you know. All of us use things such as computers, mobile phones, social media and telecommunications technology every day. This is your chance to own little pieces of some of your favourites.
It is full of diversification options. As mentioned above, the tech sector has grown as technology has progressed and changed. That means a lot of different options for investment — even if some parts of the sector do poorly, others can still thrive.
Tip: Diversifying your portfolio can help you avoid putting all your investing eggs in one basket, mitigating risk if a certain type of asset or industry starts performing poorly.
Which risks are involved with tech stocks?
As with any sector, technology stocks come with some risks. Here are a few factors that could negatively impact some tech stocks:
Competition
Disruption is a major part of the success story behind many tech stocks. There are always other innovators and competitors who will try to do things better for cheaper. This potential for change that makes the tech sector so exciting can also make it dangerous for investors.
Government regulations
Sometimes governments will step in and place restrictions on some aspects of the tech world. Good examples of this are the recent battles for data protection and net neutrality.
Environmental concerns
One of the same potential benefits of the sector can also lead to falling share prices. Millennial investors and other traders are putting more emphasis on ethics through socially responsible investing (SRI) and environmental, social and governance (ESG) investing.
While potentially offering better outcomes for the environment and workplace diversity, this can be detrimental to older tech companies whose operations do not align with these interests.
Confusion
Sometimes it can be difficult to understand the ins and outs of what tech companies are doing because their offerings and services are highly specialised and complex. This can make it difficult to follow.
Crowding
Millions of people have invested in a handful of the biggest tech stocks. While that is usually not an issue, it can be if there is a massive sell-off on the back of bad news. If you do not time it right, you could miss the boat on selling before values plummet.
Volatility
As mentioned earlier, technology stocks can be volatile, with companies that do not keep up with changing consumer needs becoming obsolete within the market. Keeping track of consumer trends and how a company changes with the times will help you decide if technology stocks are a good investment for you.
Which metrics should I look for?
You do not have to know how many megabytes are in a gigabyte in order to research technology stocks. Here are some key metrics to look out for when trying to decide which are the best tech stocks to buy.
User base numbers
A tech company’s user base numbers can be good to monitor, especially if you are looking at something like social media or a streaming service. The more people who use it, the more people there are to talk about it and create content for it.
Cash flow
Cash flow can also be a good metric to keep your eye on. As discussed, the tech sector requires a lot of adaptability and flexibility for companies to stay ahead of an ever-changing curve. Money makes that ability to shift on the fly possible, while also helping to weather short-term storms.
Price-to-earnings (P/E) ratio
As with other sections of the market, a company’s price-to-earnings (P/E) ratio can be a good indicator of things to come, especially for more mature companies. On the other hand, for companies that are not quite as established and are not profitable yet, it is good to see a trend of positive revenue growth that shows a road map to profit.
There are other metrics that are harder to quantify that can be helpful, too. This includes whether or not a company has shown a history of adapting to changing needs, as well as if the product or service they offer is going to remain or become vital in the future.
Which tech stocks can I invest in?
You can invest in a variety of technology stocks, from the giants of the tech world to some of the industry’s up-and-coming companies which are challenging the status quo.
With so many different stocks to choose from across the technology sector, familiarising yourself with some of its biggest names and their past performance can be a good place to start. The five companies below represent some of the biggest, farthest-reaching tech organisations in the world:
Meta Platforms (META) — The biggest social media platform in the world, Facebook has in recent years expanded its reach to include messaging platform WhatsApp and popular photo-sharing app Instagram. Its habit of making headlines makes it one of the more interesting tech stocks on the market.
Microsoft (MSFT) — The tech giant is never far from the innovating action, with many expecting it to be a stock to watch as it continues to increase its presence in the cloud computing space.
Amazon (AMZN) — From its humble beginnings as an online bookseller to an online marketplace where you can get almost anything, Amazon was one of the big winners of 2020 as e-commerce boomed. Its presence as a leader in the space makes it well placed to see sustained success as increasing numbers of people become accustomed to shopping online.
Alphabet (GOOG) — Google’s parent company, Alphabet is one of the most highly valued companies in the world. Those who got in on the ground floor are certainly happy, as a $1,000 investment in its 1994 IPO is now worth well over $40,000. Like its contemporaries, it provides diversification in terms of offerings and services.
Intel (INTC) — One of the world leaders in microchip production, built off the back of a long-time partnership with Microsoft, Intel has been hit by big clients like Apple moving to in-house solutions such as finding alternative suppliers.
The technology sector offers you a chance to get involved with the rapid, exciting digital changes happening around us.
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FAQs
- Does Warren Buffet invest in tech stocks?
Respected investor Warren Buffet previously avoided investing in tech stocks because he preferred to invest in companies he understood better. However, he has since changed that outlook and has invested in some tech stocks.
- Are tech stocks good investments?
As with any asset, tech stocks come with potential risk. Determining if they are a good investment for you depends on many factors, including your appetite for volatility and the rest of your portfolio’s makeup.
- What is price-to-earnings (P/E) ratio?
Price-to-earnings (P/E) ratio is how much you should expect to invest in a company in order to earn a dollar of its earnings.
This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments. This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past performance of a financial instrument, index or a packaged investment product are not, and should not be taken as a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.