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Tech stocks: A complete guide on how to invest in them

November 20, 2020 12:30 UTC
Reading time: 24 minutes

Technology affects everything that happens every day. From our smartphones and computers, to advances in medical devices to satellites and cars, technology is everywhere. It is a part of almost every sector. So it's only natural that a large number of investors are seriously excited about investing in tech stocks. If you are also interested in this topic, then you're in the right place!

In this article you're going to learn about:

  • What is a tech stock?
  • Types of technology companies
  • Why invest in tech stocks?
  • Risks in investing in shares of technology companies
  • How much money should you spend investing in tech stocks?
  • How should you choose the right tech stocks to invest in?
  • How can you invest in tech stocks?
  • The most popular tech stocks
  • Which tech stocks should you buy for Black Friday and Cyber Monday?
  • How can you start trading tech stocks?

Let's not waste any more time. Let's begin!

Invest in tech stocks

What is a tech stock?

A tech stock is a share of a company that researches, develops or manufactures products and/or services that use technology. Any company where most of the products and services are heavily influenced by technology can probably be called technological.

But it should be noted here that with each passing year, every business, no matter what it does, becomes more and more dependent on technology. For example, in 2019, McDonald's announced that it was acquiring an artificial intelligence (AI) company to help improve the experience of drivers entering stores. Does that make McDonalds a technology company?

It's important to look at the end product or service that a company offers. Despite the amount of technology behind the delivery, the Big Mac is still a burger, not a technology!

A technology company's stock can range from microchip manufacturers and software vendors, to artificial intelligence and biotechnology.

The shares of companies such as Apple, Amazon, Alphabet (owner of Google), Cisco, Intel, Microsoft, Netflix, Verizon and many others are easily considered tech stocks. The diversity in this technology sector is huge and, in practice, a suitable technology campaign can be found for every investor.

The performance of tech stocks is often a leading indicator of the state of the economy and the stock market in the United States and around the world.

Types of technology companies

We have already noted the serious diversity of companies in the technology sector. To get a clearer idea of the different types of technology companies you can invest in, we will conditionally divide them into 5 broad categories, that may complement each other:

  1. Software companies: These companies write code in various programming languages that contributes to their core products such as software, software technology, software development and distribution. Microsoft is the largest software vendor in the world.
  2. Hardware companies: Unlike software companies, hardware companies produce physical technologies that anyone can touch, such as computers, smartphones, printers, hard drives, modems, and so on. Cisco is an example of such a company.
  3. Microchip manufacturers: Technically, computer microchip manufacturers belong to hardware companies. They help the machines work. Intel is the largest company that produces microchips.
  4. Internet information providers: These are all the websites you visit daily to get some information. These may include some very popular companies such as Google and Facebook, and rely heavily on advertising and sales.
  5. Telecommunications: These types of technology companies help connect by providing an internet connection. Examples of such companies are Verizon and AT&T. The biggest driver of these companies seems to be the introduction of 5G technology.

Each investor will make their choice of which type of technology companies to direct their capital into. However, it's recommended that all capital earmarked for investment in the technology sector not be directed to a single company or just one type of technology company, in order to diversify the portfolio.

Why invest in tech stocks?

Imagine that a man fell asleep in the early 90's and woke up today. The difference between these two worlds is huge and this person may have trouble accepting the reality around him. This has only been happening for about 3 decades, and technology is at the heart of human innovation.

All the next-generation technologies you keep hearing about, such as cloud computing, the Internet of Things (IoT), artificial intelligence (AI), autonomous vehicles, and more, are part of today's technological revolution.

The reasons for investing in technology stocks can be many and varied - from maintaining and increasing capital to promoting innovation, but let's formulate the most popular of them. Let's see what you can get by investing in the top tech stocks:

  • Exposure in the fastest growing economic sector in the world
  • Exposure to innovation
  • Opportunities for capital gains and achievement of financial goals
  • Opportunities for passive profitability in the form of dividends
  • Opportunities for diversification of a portfolio of assets
  • Opportunities to save or retire
  • Protection from inflation
  • High liquidity, as some shares of technology companies are among the most traded in the world

Here we should also note the share of the technology sector in the broad US S&P 500 index, which includes the 500 shares with the largest market capitalization, from 11 economic sectors. According to a study by siblisresearch.com, technology companies have the largest share in the index, amounting to over 28%.

These are record values and are almost twice as much as the second largest sector in the S&P 500 - healthcare.

At the same time, it's good to compare the performance of the Nasdaq 100 technology index with that of the broader market in the face of the S&P 500, to see if the technology stocks really offer better returns than the market average.

In the following graph you can see the performance of the Nasdaq 100 (red line) and S&P 500 (blue line):

performance of the Nasdaq 100 and S&P 500

Source: TradingView

The graph above clearly shows that in the past 10 years:

  1. The Nasdaq 100 grew 625.23%
  2. The S&P 500 is up 243.03%

Thus, we can safely conclude that the technology sector has performed stronger than the wider market in the past 2 decades. And if we add the period in the 90s, from the last century, before the "dotcom" bubble, we see that the dominance of technology companies is even longer.

Even this fact alone is a very serious reason for investors to look at the technology sector. Of course, any investor can find many other answers to the question, "Why invest in technology stocks?"

Risks in investing in shares of technology companies

Like any investment in technology companies, it has its risks. Here, I'll list the main ones:

  • Sharp changes in the technological sector, such as the disappearance/replacement of some products with the introduction of newer ones
  • Higher volatility in stock prices compared to most other economic sectors
  • Higher valuation of companies in this technology sector (higher price/profit ratio)

These risks seem quite reasonable against the background of the rapid development of technology and expectations for new products and services in the future.

Now, what if you could test your hand at trading the best tech stocks and more than 8,000 financial instruments without risking equity? You can do just that with Admiral Markets. Get your demo account now by clicking on the banner below:

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How much money should you spend investing in tech stocks?

You already understand what a technology stock is and why you should invest in stocks of technology companies. Now is the time to look at another key issue. How much money should you invest in technology stocks?

The answer to this question depends mainly on three personal factors:

  1. Personal opportunities
  2. Personal financial goals
  3. Personal tolerance for risk

Personal opportunities can be very individual for different investors and, therefore, it isn't possible to determine the exact amount to start with.

At the same time, start identifying your financial goals. What would you need in the future? You may want to buy a house or a car, finance your child's education, plan vacations abroad, start or develop a business or a new venture, or just have enough money for when you retire.

The answers to these questions will give you an idea of your financial goals.

The next aspect you need to consider is your risk tolerance, or your ability to take risks. This depends on factors such as current income, savings, expenses, financial obligations (such as paying off a mortgage) and adequate financial coverage for life and health. And not least of all, your own temperament.

You can also look at your investment horizon, or the time for which funds can be set aside without needing them. This will depend on whether you focus on short-term investments or long-term ones. A cumulative investment (a certain amount each month, for example) can make a seemingly small return look serious when it comes to longer periods of time.

Both extended deadlines and higher rates of return could give you similar results. This makes different investments interesting and suitable for different purposes.

How to choose the right tech stocks?

The serious variety of tech stocks and the rapid development suggest that you need to analyze the companies you choose and assess their advantages over their competitors.

Each investor has their own individual approach when choosing the best tech stocks to buy. Despite the uniqueness of each investment campaign, some advice can still be given that can be useful in the selection of good technology stocks to invest in.

Below we will mention some of them.

Methods for estimating the value of tech stocks

Traditional methods of valuing companies include studying factors such as earnings per share, price/earnings ratio, growth rates, formulas for asset pricing, and calculating return on assets. However, when evaluating technology companies with these methods, you won't always be able to capture the potential of fast-growing companies in the technology sector.

Most technology companies must constantly invest back in research and development of their products to stay ahead of the competition. To be competitive, technology companies must continue to spend. Therefore, indicators such as:

  • Cash: Includes cash, short-term investments and long-term investments
  • Long-term debt: Money that will have to be repaid in the coming years
  • Free cash flow: All cash provided by operations minus capital expenditures

Many technology companies are not even profitable yet. You can also use an indicator such as revenue growth instead of traditional valuation methods.

Generally speaking, companies that have a lot of cash, little debt and strong cash flows can not only experience a decline, but also strengthen afterwards. This is because they take advantage of lower prices and can buy back their own shares at lower prices, acquire start-ups at a discount or simply offer their goods in less competition.

Return on investment in tech stocks

In the most basic sense, return is the amount that is gained or lost from an investment over a period of time. Return on investment can be expressed as a nominal value in a given currency (USD, EUR, GBP, etc.), in addition, it can be presented as an amount after taxes, fees and inflation.

The main types of returns are:

  1. Nominal return - the net profit or loss from an investment in nominal terms. This is determined by the change in the value of the investment for a certain period of time and all costs are deducted from it.
  2. Real return - in this case, the net profit or loss is adjusted for inflation and other external factors. This method expresses the nominal measure of return in real terms, which keeps the purchasing power of capital constant over time.

You can make a calculation related to profitability. Divide a company's profits by market capitalization and multiply by 100 to get a percentage. If you're happy with such a return and it exceeds the long-term annual return on the broad market S&P 500 (about 10%), then you may want to focus on investing in such a company.

Revenue, position in the industry, future of the industry

One of the main questions you need to ask yourself before investing in technology stocks is, "What is the company's main revenue?":

  • If much of the company's revenue comes from current technology, which is gradually becoming obsolete, you may want to invest in another technology stock
  • If the company only profits from the sale of prototypes and models for pre-sale, this can also be quite a risky investment
  • Ideally, a technology company should have many different cash flows

Another question that is practically mandatory before investing in technology stocks is, "Which industry does the company belong to?":

  • It may be appropriate to invest in an industry that is growing and will remain stable even 5 years later
  • Is the company a leader in the industry (lower risk) it operates in or is it still developing (higher risk)
  • Diversification of investment in tech stocks from different industries is recommended

The future of a technology company and the price of its shares depend a lot on the industry it operates in. So, be sure to think about the company's business before heading to buy its shares.

How can you invest in tech stocks?

In fact, investors have several opportunities to gain exposure investing in technology stocks, each of which has its advantages and disadvantages.

Each investor must choose the right tools for themself, taking into account their personal capabilities, personal financial goals and risk tolerance.

Here are the main 3 opportunities for investing in technology stocks:

Let's give a little more detail about each of them.

CFDs on tech stocks

A CFD is a contract for difference, which is concluded between a trader and a broker to exchange the difference in the price of an asset. This contract is active until it is closed by the trader, and payments under it are in cash, instead of the actual delivery of the traded asset.

In practice, Contracts for Difference provide investors with almost all the advantages of real investment in financial instruments, but without actually owning them.

Let's first note the advantages of trading contracts for difference:

  1. Short sales. One of the main advantages of today's CFD trading lies in the possibility of short positions. In this way, you can potentially benefit from both rising and falling markets
  2. Use of leverage. CFDs allow you to manage a larger amount than you have in your trading account. This happens through the use of leverage
  3. Opportunity for transactions within the day. CFDs allow taking advantage of short-term price movements in stock, index or commodity markets
  4. Easy access to global markets. Easy access to many financial instruments, such as stocks, bonds, currencies, commodities, cryptocurrencies, etc. through an intermediary of your choice
  5. In CFD trading with Admiral Markets there are often no fees and commissions for opening and closing positions
  6. There are no restrictions on trading style or investment amount (at least for some brokers, such as Admiral Markets)

Like any investment, a CFD has its drawbacks:

  1. There is no possession of the underlying asset, with which there are no property rights in case of bankruptcy of the company
  2. CFD may be a less regulated product
  3. The leverage effect can be a double-edged sword. This means that in addition to increasing potential profits, the financial lever also increases potential losses
  4. Swap fees to hold the position at night

Trade CFDs on the world's best tech stocks now with no commission. Click on the banner below to open an account and get started today!

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Real shares of technology companies

Advantages of investments and trading in real shares:

  1. Real possession of the base with all associated property rights
  2. Less risk due to lack of leverage
  3. No swap fees to keep the position open at night
  4. More stable regulation

At the same time, the disadvantages of investment and trading in real shares compared to trading in CFDs of shares are:

  1. Lack of opportunity to open short positions
  2. Lack of opportunity to use leverage
  3. Availability of fees and commissions for purchase and sale
  4. Lack of opportunities to trade in many different markets

Whether you are going to trade CFDs of stocks or trade in real stocks you need to go to a regulated broker like Admiral Markets.

ETF investing in tech stocks

ETF means "exchange traded fund". In general, an ETF is a basket of securities that you can buy and sell on the relevant stock exchanges through a financial intermediary (broker).

These funds can invest in many different asset classes, one of which is tech stocks.

The benefits of investing in an ETF include:

  • Lower costs because you can buy a basket of shares instead of just one
  • Automatic portfolio diversification
  • Tax efficiency (for example, actively managed mutual funds often buy and sell assets, generating taxable capital gains, which is not the case with ETFs)

Disadvantages include:

  • In some cases, ETFs may have lower liquidity than equities
  • There may be some discrepancies with the underlying asset that follows the fund

Here are some popular ETFs which allow you to get exposure in the technology industry:

  1. Fidelity MSCI Information Technology Index ETF CFD
  2. Vanguard Information Technology ETF CFD
  3. Technology Select Sector SDR Fund ETF CFD

There is no right or wrong tool to use in starting investing in technology stocks. You just have to choose the most suitable one for your trading and investment style.

Invest in company stocks and technology ETFs with a regulated broker such as Admiral Markets. Get started today by clicking on the banner below:

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The most popular tech stocks

The technology sector includes some of the largest companies in the world, some of which have already exceeded $1 trillion in market capitalization. Examples of such companies are:

  1. Apple (exceeded even $2 trillion market capitalization)
  2. Amazon
  3. Microsoft
  4. Alphabet (owner of Google)

These are some of the most popular technology stocks among traders and investors, some of which constitute the famous acronym FAANG (Facebook, Apple, Amazon, Netflix and Google).

That is why we will now say a few words about each of them.

Apple shares

Apple Inc. designs, manufactures and markets smartphones, personal computers, tablets, portable devices and accessories worldwide. The company also offers some related services.

Apple products include the iPhone, a line of smartphones; Mac, a line of personal computers; iPad, a line of multifunction tablets, and accessories including AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch and other Apple-branded accessories.

The company was the first in the United States to reach $1 trillion in market capitalization (August 2018), and subsequently the first to reach $2 trillion (August 2020).

Below you can find a chart of Apple's share price:

AAPL weekly chart

Source: Admiral Markets, MetaTrader 5, #AAPL, Weekly chart. Data range: from February 3, 2013, to November 6, 2020. Accessed on November 6, 2020, at 5:05 p.m. Please note that past performance does not guarantee future results.

Amazon shares

Amazon.com, Inc. participates in the retail sales of consumer products and subscriptions in North America and internationally. The company operates in three segments: North America, International and Amazon Web Services (AWS). It sells goods and content purchased for resale from third parties through physical and online stores.

Amazon also manufactures and sells electronic devices, including Kindle, Fire tablets, TVs and other devices; provides Kindle Direct Publishing, an online service that allows independent authors and publishers to make their books available in the Kindle Store; and develops and produces media content.

The second company in the United States to reach a market capitalization of $2 billion is Amazon. And in the following image you can find a chart of Amazon's share price:

AMZN, Weekly chart

Source: Admiral Markets, MetaTrader 5, #AMZN, Weekly chart. Data range: from February 3, 2013, to November 6, 2020. Accessed on November 6, 2020, at 5:05 p.m. Please note that past performance does not guarantee future results.

Microsoft shares

Microsoft Corporation develops, licenses, and maintains software, services, devices, and solutions worldwide. Its productivity and business process segment offers Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance and Skype for Business.

In addition, the company owns LinkedIn and Dynamics 365, a set of cloud-based and local business solutions for small and medium-sized businesses, large organizations and business units. Its smart cloud segment licenses SQL and Windows servers, Visual Studio, System Center and the Azure cloud platform.

After Apple and Amazon, Microsoft is the third trillion dollar company in the United States. Below is a chart of the share price of Bill Gates' company:

MSFT, Weekly chart

Source: Admiral Markets, MetaTrader 5, #MSFT, Weekly chart. Data range: from February 3, 2013, to November 6, 2020. Accessed on November 6, 2020, at 5:05 p.m. Please note that past performance does not guarantee future results.

Google shares

Alphabet Inc. provides online advertising services worldwide. The company operates primarily through Google segments, but there are others. The Google segment offers products such as Ads, Android, Chrome, Google Cloud, Google Maps, Google Play, Hardware, Search and YouTube, as well as technical infrastructure.

The company also offers digital content, cloud services, hardware devices and other various products and services, such as smartphones.

Alphabet was the fourth and last (at least so far) to present to the elite "$1 trillion club". Below you can also see its stock price chart:

GOOG, Weekly chart

Source: Admiral Markets, MetaTrader 5, #GOOG, Weekly chart. Data range: from February 3, 2013, to November 6, 2020. Accessed on November 6, 2020, at 5:05 p.m. Please note that past performance does not guarantee future results.

Tech stocks for Black Friday and Cyber Monday

The period before and after Thanksgiving in the United States is associated with intense shopping and can be said to mark the beginning of shopping for the Christmas and New Year holidays. These consumer habits have long since spread beyond the United States and have conquered almost the entire world.

This is the reason this period, at the end of November, is of key importance for retail companies, respectively for technology companies. Investors, on the other hand, try to find which of these companies is best positioned to win during this period, in order to buy its shares and try to take advantage of the increased profits.

Black Friday is the name given to the first day after Thanksgiving and is one of the most important events for consumers and retail companies. At the same time, Cyber Monday is the Monday after Thanksgiving weekend, on which consumers return to work and can shop online.

  1. Black Friday is more important for retailers with physical stores
  2. Cyber Monday is more important for e-commerce companies

In 2019, online sales on Black Friday reached $7.4 billion, and those on Cyber Monday exceeded $9 billion. These were record values for both shopping days.

Costs during this period can be used to measure the overall health status of retail sales.

A particularly strong or weak period of shopping from Black Friday to Cyber Monday tends to have a big impact on the shares of technology companies. Let's see which of the best tech stocks could potentially benefit from this important time of year:

The technology companies with the biggest earnings in the period around Black Friday and Cyber Monday, may be:

Of course, choosing which are the best technology stocks to invest in before the big shopping event around Black Friday, Cyber Monday and Christmas is a personal decision for each investor.

How can you start trading tech stocks?

Once you know what a technology stock is, why you should start investing in tech stocks, how much money you should spend and how to invest in these companies, it's time to move on to the more interesting and practical part, namely making your investment in technology stocks.

You can do this in just three steps:

  1. Open a stock trading account
  2. Download your stock trading platform
  3. Open a New Order window and make your first deal!

For more information on how to open a stock trading account with Admiral Markets, watch the following short video:

Let's look at an example of how to buy/sell CFDs on technology stocks using Apple.

How to buy shares

  1. Log in to your account with Admiral Markets (MT4/MT5/WebTrader/Mobile app)
  2. Go to Market Condition
  3. Look for Apple shares
  4. Right-click on shares and then select "Chart Window"
  5. Once the graphic appears, click on the "New Order" button (in the Toolbar below the menu)
  6. Select the number of lots in the Volume field, as well as stop loss and take profit levels, if you want to place these
  7. Click on the blue "Buy on Market" button

When you buy (a long position) in shares of Apple, you anticipate that they'll rise in price so that you can make a potential profit from your deal.

How to sell shares

  1. Log in to your account with Admiral Markets (MT4/MT5/WebTrader/Mobile app)
  2. Go to Market Condition
  3. Look for Apple shares
  4. Right-click on the stock and then select "Chart Window"
  5. Once the graphic appears, click on the "New Order" button (in the Toolbar below the menu)
  6. Select the number of lots in the Volume field, as well as stop loss and take profit levels, if you want to place these
  7. Click on the red "Market Sale" button

When you sell (short position) Apple shares you anticipate that they'll fall in price so you can make a potential profit from your deal.

About Admiral Markets

We are a broker with a global presence and are authorized and regulated by financial regulators such as the Financial Conduct Authority (FCA), the Cyprus Securities and Exchange Commission (CySEC) and the Australian Securities and Investments Commission (ASIC). We provide access to over 8,000 financial trading instruments such as Forex & CFDs on stocks, indices, bonds, commodities, ETFs and cryptocurrencies, as well as investment opportunities in real stocks and ETFs.

With Admiral Markets, you can use the most innovative trading platforms such as MetaTrader 4 and MetaTrader 5 for free, as well as the exclusive MetaTrader Supreme Edition plug-in.

Start trading tech stocks with the world's number 1 platform for trading multiple assets - MetaTrader 5, provided by Admiral Markets. Download MetaTrader 5 today, completely free of charge by clicking on the following banner:

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INFORMATION ON ANALYTICAL MATERIALS:

The data provided provides additional information on all analyzes, estimates, forecasts, forecasts, market reviews, weekly prospects or other similar estimates or information (hereinafter referred to as "Analysis") published on the Admiral Markets website. Before making investment decisions, pay special attention to the following:

  1. This is marketing communication. The content is published for informational purposes only and can in no way be construed as investment advice or recommendation. It is not drafted in accordance with legal requirements designed to promote the independence of investment research and is not subject to a review before the dissemination of investment research.
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  4. The analysis shall be prepared by an independent analyst Boris Petrov, a financial analyst (hereinafter referred to as the "Author") on the basis of personal assessments.
  5. While all reasonable efforts are made to ensure that all sources of content are reliable and that all information is presented as far as possible in a comprehensible, timely, accurate and complete manner, Admiral Markets does not guarantee the accuracy and completeness of any information contained in the analysis.
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