Human civilization revolves around technology. In fact, one can gauge the evolutionary progress of a settlement by the technologies it employs. In the light of the recent pandemic that slashed Nasdaq by almost 30% in late March, some tech biggies like Apple and Microsoft have recorded all-time highs. No surprise that in the year 2020, the top 5 stocks on Nasdaq were all tech stocks.
That being so, in the financial ecosystem today, investing in tech stocks can prove to be a lucrative option in putting your money to work. Here’s a comprehensive, ultimate beginners’ guide to investing in tech stocks.
What are tech stocks?
Much like all other industries (textile, for example), companies in the Technology industry (like Facebook or Dell) also have shares to trade. The shares from these companies end up in tech stocks. One could choose to safely invest in Big Tech, or venture out in the open waters and start angel investing if feeling a little adventurous.
Industries in Tech Stocks
The technology sector is an umbrella that encompasses various industries, all with their own market value. Here is a list of some of the major ones:
- Computer hardware and software: This industry focuses on consumer electronics and software subscriptions. The best examples are Microsoft and Apple.
- Telecommunications: All the telephone networks, broadband, and internet, 4G (and soon, 5G too) come under the telecom industry.
- Semiconductors: Companies that manufacture computer chips fall under this type. Think of Intel.
- Information providers: Google, a name that’s become a verb, is an information provider.
The FAANG and Big Tech Game
When it comes to investments, there are certain no-brainers on the list. FAANG, a popular acronym in the tech stock jargon, expands to include Facebook, Apple, Amazon, Netflix, and Google – the safe bets in the tech stock world. Their stable first principles and reliable track record of growth over the long term attract investors to them. However, an interesting point to note is that some of the oldest tech stock companies like Microsoft and Intel have outperformed FAANG members in the past financial year. It definitely pays to have your money bet on Big Tech.
How to Invest in Tech Stocks
Warren Buffet, one of the most successful investors in the world, keyed the concept of Economic Moat. In selecting a technological stock, or any stock for that matter, it is important to understand the competitive dynamics of the company one is interested in. Ask the following questions:
- Does the company consistently strive to achieve an edge over its competition?
- Does the company have a sound strategy to gain a cost advantage over its rivals?
- Are more and more people talking about the company? Think of it in this way: Would you ever sign up for a Twitter account if people weren’t talking about it?
- What is the switching cost a consumer would experience with this company? Higher switching costs typically work to retain consumers and prevent them from moving to rivals’ services.
- Does the company hold exclusivity in any aspect: In the form of patents or licenses, ideas, or even a brand image that starts a trend?
An effective moat strategy equips a company to sail through slumps and bumps in the financial ecosystem of the stock market. This could be one of the Big Tech or a startup with good promise.
Once the research is done, the next step is to choose the medium of investment:
- Countless digital platforms today, in the form of apps or websites, offer convenient investment and withdrawal processes. Some even cater to basic market analysis to help decide the next investment. Some of the popular names in this niche are Acorns, Sharekhan and Angel Broking. Registration is a simple process, and within a few minutes, one can start trading. This method is best used for individual tech stocks.
- Another method to start investing in tech stocks is the very traditional, stock-broker method. There are countless investment agencies that still offer offline services and manage one’s stocks efficiently; although, with the onset of conveniently available internet and digital platforms, this method is a bit dated.
- The third method is to sign up for Exchange Traded Funds (ETFs). While in individual stocks one is directly trading a company’s stock, in ETFs, a professional manages a bunch of shares from different companies for an investor. Mutual Funds are a great example of ETFs. ETFs help investors extract optimum profit from their investment in the long term at the hands of a professional. Since one isn’t putting all his eggs in one basket, there is less loss in investing in ETFs than solely in an individual company should the market experience any dips.
Are There Any Risks in Tech Stocks?
Of course. Like any other stocks, tech stocks are also traded on the basis of future returns an investment will generate on any company’s shares. This data, although derived from extensive study and critical analysis of the stock market, may not always be accurate. Analyses notwithstanding, the Bulls and Bears of share trading can suddenly decide to go south based on incidences in the base industries of a company.
Even so, the reliability of a tech stock can be reasonably gauged from the historical data of a company in its recovery time from market slumps and degree of volatility in response to global incidences and events.
Technology is the future.
Seeing the trends in tech stocks over the past couple of years, as highlighted above, tech stocks offer better returns and are more likely to bounce back into the game quicker, even if there is a slouch in the market. The trick lies in creating a good mix of shares in one’s stocks – if one share dips, another may rise. Including tech stocks of Big Tech in your basket will help one create a great investment portfolio.
If tech stocks and trading still doesn’t look appealing, one might try other ways to invest money.
Ayush Jalan entered the writing industry at 17 and has experience covering a variety of topics such as technology, marketing, eCommerce, productivity, lifestyle, gaming, entertainment, product descriptions, company profiles, and more. When he’s not writing, he likes to play the ukulele, doodle, read, play video games, go for walks, and catch up on friends.