It’s almost become a trope at this point: Your friend’s aunt bought some tech stocks a long time ago, and generated massive returns over the years. Or, your cousin knows somebody who knows somebody who bought some tech stock for a few dollars per share in the 1980s, and now they’re a multimillionaire.
While these anecdotes are enticing, if you’re looking to buy a first tech stock or want to add some diversity to your portfolio, you may find the reality to be slightly different from the stories. There are many kinds of tech stocks, each with its own performance trends, pros, and cons. Here are a few things to know about investing in tech stocks.
Why Investors Are Investing in Technology
In recent decades, much of the growth in the stock market overall has been concentrated in the shares of technology companies. That’s one of the main reasons that investors may be particularly interested in investing in tech stocks or related securities.
As of July 2024, the top five most valuable companies in the S&P 500 are in the tech sector. These firms — Apple, Microsoft, Nvidia, Amazon, and Meta — have an average market capitalization, or overall stock value, more than $1 trillion.
Five Largest Companies in the S&P 500 Index | |||
---|---|---|---|
Company | Ticker | Market Cap* | 5-year growth* |
Apple | AAPL | $3.375 trillion | 110% |
Microsoft | MSFT | $3.17 trillion | 294% |
Alphabet | GOOGL | $2.7 trillion | 233% |
Amazon | AMZN | $1.91 trillion | 140% |
Meta | TSLA | $1.18 trillion | 211% |
*As of July 30, 2024 |
Investors flock to technology companies, especially the previously mentioned tech giants, because they’re often considered solid businesses.
The products of technology companies — especially software companies — are relatively cheap to reproduce but can be quite expensive to buy. Apple, for example, prices iPhones ahead of their competitors, sells a lot of them, and then operates an ecosystem of apps and services that generate steady revenue. Amazon’s success is attributed to the effectiveness of its operations and low prices. For Alphabet, the sheer scope of its networks and the popularity of its services allows them to sell more ads than its competitors.
Aside from the giants that have established business models, many investors pour money into tech companies due to the promise of future earnings. Even when tech companies are not profitable or see regular cash flows, investors will still support the stocks because of the potential for future earnings. Companies like Amazon and Tesla took years before they turned steady profits.
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Popular Technology Stocks to Own
The technology industry is incredibly diverse. Beyond the five companies mentioned above, there are many others, including several that comprise the S&P Technology Select Sector Index, a popular market index that tracks the tech space. Below are some of the largest companies that comprise that specific Index, outside of the five tech stocks mentioned above.
Companies in the S&P Technology Select Sector Index | ||||
---|---|---|---|---|
Company | Ticker | Technology Sector | Market Cap* | 5-year growth* |
Broadcom | AVGO | Semiconductors | $684.13 billion | 570% |
Salesforce | CRM | Software | $248.34 billion | 204% |
Adobe | ADBE | Software | $238.22 billion | 160% |
Advanced Micro Devices | AMD | Semiconductors | $221.81 billion | 610% |
Cisco Systems | CSCO | Communications Equipment | $194.13 billion | -20% |
*As of July 30, 2024 |
How Can You Invest in Tech Stocks?
At the most basic level, you can invest in tech stock by buying the individual stocks of an appealing company. That can be done in the same way as buying any other type of stock or security through a brokerage or investing platform.
Another way to invest in tech is by trading technology-focused exchange-traded funds (ETFs) or mutual funds. Tech ETFs and mutual funds allow investors to diversify their investments in a single security, which may be less risky than buying a specific company’s stock.
If you are interested in a particular tech sector — like artificial intelligence or green tech — you can invest in more targeted funds rather than broad-based technology-focused ETFs.
Different Sectors for Technological Investment
The technology industry is vast, filled with companies specializing in different areas of the market. For an investor, this means it’s possible to diversify, investing in tech stocks across various sectors.
Artificial Intelligence
Artificial intelligence (AI), which refers to ways that computers can process data and automate decision-making that humans would otherwise do, is a burgeoning tech sector. Many companies are operating in this sector, using new technologies to support fields like finance and healthcare. Artificial Intelligence, along with the related field of Machine Learning (ML), has long been one of the most exciting technology areas.
Transportation
Another bustling sector of the industry is transportation. Tech underlies all transportation, and some of the most exciting companies are building electric cars, creating the batteries and software that support the navigation and operational systems in automobiles, or using software to connect drivers and passengers.
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Streaming
Streaming companies have completely revolutionized the entertainment industry. These companies offer direct-to-consumer content, including shows and movies, that is bundled in a monthly subscription. There are standalone streaming companies, companies that include streaming as an ever-growing part of their business, and companies that build digital and physical infrastructure to support streaming services.
Information Technology
Information technology (IT) is one of the broadest and most valuable sectors of the technology industry. It typically refers to how businesses store, transmit, and use information and data within and between networks of computers.
Semiconductor Technology
Semiconductors are arguably the foundation of all technology. Semiconductor companies make components found in phones, computers, and other electronic devices. The manufacturing process for semiconductors is incredibly precise and expensive, making the industry ruthlessly competitive.
Web 3.0
In recent years, cryptocurrency, blockchain technology, and Web 3.0 have been the focus of many investors. That’s because computer engineers and companies are now developing new technologies that will allow users to interact with the web in a more interactive, personal, and secure way. These new technologies may usher in new opportunities for investors.
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Evaluating a Tech Stock Before Investing
When investing, you must carefully evaluate the stocks you’re interested in.
Technology companies, in particular, tend to have high price-to-earnings (P/E) ratios, meaning that the company’s profits may seem low compared to the price of their shares. This is often because investors are expecting rapid future growth.
Other key metrics include price-to-sales, which compares the stock price to the company’s revenue. This is something to consider in the case of a fast-growing company that doesn’t yet have substantial profits.
Another critical factor is the company’s overall revenue growth — the pace at which revenue increases year-over-year or even quarter-over-quarter.
A more detailed metric that can be useful for tech companies is “gross margins,” which is the difference between a company’s revenue or sales and the cost of generating those sales, divided by total revenue. The resulting percentage indicates whether the company can make money on the actual product it sells and how much. If the company’s other costs can go down as a percentage of total revenue, profits can grow more quickly.
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Pros of Adding Tech Stocks to a Portfolio
There are many benefits to investing in tech stocks, most notably attractive returns. With artificial intelligence, blockchain, and Web 3.0 technologies on the horizon, there are increasing opportunities to invest in this sector. These are some possible benefits of adding tech stocks to a portfolio.
• There are many blue chip tech companies. Blue chip stocks typically refer to stocks from long-established companies with good returns. Today’s blue chips include huge tech companies like Apple, Alphabet, and Amazon.
• Some tech stocks pay dividends. There can be benefits to dividend-paying stocks, including consistent earnings, which might indicate that the company is positioned to deliver strong performance.
• Investors can buy shares in things they use. Most people use some tech in their daily routines. You might have a smartphone, or a laptop, hop on a social network, or order groceries or clothing online. With a tech stock, investors can buy a little piece of the companies they know and like.
• It’s easy to diversify in tech. Tech stocks aren’t a monolith. Investors can add diversity to their portfolio by purchasing different aspects of the tech sector, for example, buying stock in social media companies, smartphone glass manufacturers, hardware makers, software companies, and even green tech companies.
A great thing about the tech sector investing space is that there’s so much of it out there, and investors should be able to find something that works for their goals, ambition, and knowledge base.
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Cons of Investing in Technology
All stocks come with their own risks and potential downsides. Tech stocks are no different. As with any stock purchase, it’s helpful to do a good amount of research before buying a stock. Take these considerations into account before deciding to pull the trigger on a tech stock.
• Potential losses. Though the tech sector has been an area of focus for investors as it’s grown in recent decades, investors should also be aware that there’s always the potential for sizable losses, too. Certain segments of the tech space can be volatile, and technology is always changing and falling out of favor. As such, it’s possible that tech stocks could see significant declines in value – sometimes rapidly.
• The potential for tech backlash. Some experts think increased regulation and government scrutiny could lead to a backlash against tech stocks that could affect their prospects. They cite 2018’s passage of the European Union’s General Data Protection Regulation (GDPR) and Facebook’s hearings before Congress as evidence that even more regulation might be coming in the future. But like many other sectors of the stock market, various tech stocks react differently in the face of volatility.
• Buying what you know can be complicated. You might have a solid grasp on some social media giants, for example, but some of the nuances of emerging semiconductor firms might be a little harder to wrap your head around. You may have to ask yourself if you want to invest in a company that you might not fully understand.
• Stocks may be priced too high. Some tech companies, like Amazon and Google, often have shares that venture into the four figures, so for a first-time tech stock investor, those companies may feel out of reach. However, many tech companies occasionally engage in a stock split to decrease their share prices.
How Frequently Should You Invest in Tech Stocks?
The frequency you invest in tech stocks will depend on your individual investment goals and risk tolerance. Some investors may choose to trade tech stocks monthly or quarterly to take advantage of any short-term price fluctuations. Others may invest in tech stocks on a more long-term basis, holding onto their shares for several years to benefit from any potential long-term growth.
What Percentage of Your Portfolio Should Be Tech Stocks?
The percentage of a portfolio allocated to tech stocks differs for every investor. For instance, some specialists might recommend that investors allocate no more than 20-30% of their investment portfolio to tech stocks, but this percentage may be higher or lower depending on the investor’s risk tolerance, investment goals, and other factors.
Mistakes to Avoid When Investing in Tech Stocks
Many investors are drawn to tech stocks because of the potential for a significant return. But the allure of large gains may cause investors to take on too much risk or lose sight of their overall investment goals.
For example, you don’t want to invest in a tech stock just because it’s popular. It’s easy to fear you are missing out when you see a particular stock’s price skyrocket. You may hear about a tech stock lot in the financial media, and you know many people who say they own it, but that doesn’t mean it’s a good investment.
Additionally, you should avoid investing in a stock just because the company is a household name. While sometimes the stocks of well-known companies do well, there are other cases of these companies not being well run and thus not being a good investment.
The Takeaway
The tech sector is vast and getting bigger by the moment as blockchain, artificial intelligence, and other technologies push boundaries. New founders are working on startups in garages and basements, potentially developing the next new thing that could change the world. Investors looking to invest in tech stocks can find a stock or ETF out there that could meet their needs.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
FAQ
Why is investing in tech stocks so popular?
Tech stocks are popular because they are some of the largest and best-performing assets in the financial markets in recent years. As a whole, the technology sector has been one of the fastest growing sectors in the economy. This means that there are a lot of new and innovative companies that are constantly coming out with new products and services. This provides investors with a lot of growth potential.
How can you start investing in tech stocks today?
You can start investing in tech stocks by trading individual stocks, invest in a tech-focused mutual fund or ETF, or invest in a more general stock market index fund that includes a mix of tech and non-tech companies.
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