06 Oct Investing in Tech Stocks: What You Need to Know
During years of rampant speculation leading up to the dot-com bubble in the late ’90s and 2000-2001, many technology stocks belonged to risky companies unable to turn a profit. Today, however, the tech sector includes companies across the whole spectrum of financial and operational health, from those still striving to become profitable to established cash cows like Apple and Facebook.
Sure, tech stocks are still more volatile than those in more established sectors like utilities and consumer goods, but as long as investors are willing to embrace more volatility, there are some stellar businesses — and potentially highly rewarding stocks — to invest in.
The sector, therefore, is worth exploring in detail. By fully understanding what the tech sector entails, including its opportunities and threats, the type of stocks that it includes, how to value a tech stock, and more, investors will be well positioned to identify and invest in the industry’s most promising stocks.
What are tech stocks?
Tech stocks are the publicly traded shares of companies engaged in selling technology-based services or products. In other words, they represent shares of ownership in technology companies available to buy or sell on the stock market.
Stocks in this sector range from those in older technology industries, such as telecommunications and personal computers, to those in more nascent segments, such as software-based internet services and online social networks.
Their business models vary substantially as well. Some companies manufacture technological equipment, such as routers and computer processors. Others design products but outsource manufacturing. Furthermore, modern organizations have adopted creative ways of selling technology services, including offering subscriptions to cloud-based applications, providing access to online networks in exchange for ad-supported experiences, charging fees for online transactions facilitated through online marketplaces, and more.
What types of companies are in the tech sector?
There are many ways to break down the tech sector, but perhaps the most useful way for investors to look at the market is through the lens of four types of businesses: software, hardware, internet information, and telecommunication.
1. Software companies
These companies make money from selling the programs used by computers. Historically, software was often sold on an à la carte basis. More recently, however, customers are increasingly paying for subscription access to software made available over the internet. This business model is often referred to as software-as-a-service, or SaaS.
2. Hardware companies
These companies sell both components for technology products and the finished technology products themselves. Examples include semiconductors, servers, computers, smartphones, consumer electronics, computer peripherals, and data storage devices.
3. Internet information companies
These companies make money from providing content, networks, and marketplaces on the internet. Yelp, for instance, provides both a platform for connecting users with local businesses and information about those businesses. eBay, for another example, provides an online marketplace for users to buy and sell goods on the internet.
4. Telecommunication companies
This industry includes companies that enable communication, primarily through telephone, data, and video. But companies that connect the world through satellite, radio, television broadcasting, and internet usually fall into this category as well.
10 types of tech stocks to consider investing in
Looking beyond this 10,000-foot view of the tech sector, investors who want to buy stocks in this space should be familiar with some of the biggest trends in tech stocks. The following 10 tech trends provide investors with themes to look for as they decide what companies they want to invest in.
Software-as-a-service (SaaS) companies charge customers a subscription or a usage-based fee in exchange for providing access to cloud-based software applications. Many SaaS companies provide software for enterprises, including sales, customer relationship management, inventory management, accounting, and workplace collaboration platforms.
Financial technology companies provide software-based solutions for various financial services. Some examples include mobile banking, digital payments, peer-to-peer mobile payments, and online budgeting and accounting software. Fintech companies often operate with SaaS business models or take a cut of the transactions made on their platforms.
3. Social networking
Social media give users access to an online network for connecting friends, family, groups, colleagues, and organizations. Facebook, of course, is the perfect example of a social networking company. Monetization models for social networks vary, but primary approaches include digital advertising, subscriptions, and a hybrid of these two.
4. Internet of Things
The Internet of Things (IoT) refers to internet-connected and software-powered devices. Thanks to technology and continuous improvements in high-speed wireless internet, once-ordinary products such as refrigerators, garage door openers, and healthcare devices now have enhanced capabilities and can be controlled through software via the internet. Internet of Things companies sell these connected devices and sometimes provide software services to assist them.
5. Artificial intelligence
The convergence of the ability to store massive amounts of data, the continuing evolution of deep learning algorithms, and advancements in graphics processing unit (GPU) computing have brought about an era of artificial intelligence (AI). AI technologies and services can learn, adapt, improve, and act on their own. Examples include voice assistants, self-driving car technology, customer service chatbots, and more. The most relevant companies in this space are the semiconductor companies involved in building the computing power for the evolution of AI. However, AI is quickly finding its way into many different fields, including transportation, risk management, investing, and more.
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