What are technology stocks?

What are technology stocks?

Beginner

1st September, 10:14
Updated: 23rd September, 07:20

Looking to invest in the products and services that will define the future?

Then it’s worth looking into technology stocks. In this lesson, we’ll explain what technology stocks are, detail their typical characteristics, and let you know the best places to go in order to purchase them. We’ve also prepared a list of technology stocks you can consider for potential buys.

What are technology stocks?

Technology stocks are stocks of companies that do their business in the technology sector. Semiconductor makers, software developers, and laptop producers are just three examples of the many types of companies that operate in this space, and it’s one of the fastest growing parts of the global economy.

Why do investors look for technology stocks?

Investors in technology stocks tend to focus on innovation, trying to find stocks with a lot of potential for future growth. Many of the largest, most profitable companies in the world have thrived in the technology sector, with their stocks racking up big gains as a result.

What are the defining characteristics of technology stocks?

1) They make cutting-edge products

The advent of the smartphone was one of the biggest product breakthroughs in modern history, an invention that now sits in the hands of billions of people around the world and has made Apple one of the world’s largest companies. That’s just one example of the kind of product technology companies can produce, and the transformative effects those products can have on company earnings, stock price, and even society itself.

2) The best tech stocks often deliver more robust earnings growth

Tech stocks’ aggressive innovation drives much of that earnings growth. So too do tech companies’ profit margins: It’s far easier to generate impressive margins when doing business, say, on the cloud than it is for companies that sell groceries or car parts.

3) They are often more volatile than other stock types

Stocks hailing from sectors such as energy and utilities tend to move fairly slowly in either direction as change in those industries happens gradually. That’s a big contrast to technology stocks, which tend to show bigger price swings on both the upside and the downside as innovations can go in and out of fashion fast as people look for the next big thing.

4) The leaders vastly outperform the laggards

Lumping all tech stocks together obscures the big differences between many of them. A website operator struggling to turn a profit bears very little resemblance in terms of earnings growth, stock performance, or any other trait compared to a titan like Facebook. Some of the largest companies on the planet are technology giants that didn’t even exist 25 years ago, and these fast-growing companies account for a lot of the sector’s wealth.

Here are some examples

Looking to add some technology stocks to your portfolio? Here are some options for you to consider: 

1) Advanced Micro Devices (AMD)

The semiconductor maker, AMD, has been one of the most successful stocks in the chip industry, surging nearly fivefold in price since the start of 2018.

2) Nvidia (NVDA)

This designer of graphics processing units for the gaming industry has seen its stock more than double over the past year, powered by some of the strongest earnings growth of any tech stock.

3) Cisco Systems (CSCO)

Cisco Systems makes networking hardware and software as well as telecommunications equipment. While tech stocks don’t often issue dividends, Cisco’s 3% dividend yield gives it an added benefit in addition to its capital gains potential.

4) Seagate Technology (STX)

Seagate falls more into the category of tech value stocks. The data storage company sports a small price-to-earnings ratio of just 8 to 1. Its stock has gradually worked its way higher since hitting a low in late March, and sits 13% off its 52-week high as of June 9, 2020.

How do I find technology stocks?

Investment websites such as Yahoo Finance and MarketWatch offer screening tools which let you search for technology stocks based on parameters such as market cap, earnings per share, and revenue growth. But you don’t have to go anywhere at all, as you can also check out some of the best technology stocks right here, with our monthly lists of enticing technology stocks.

Visit this guide for more information on how to find technology stocks > 

You now have a better understanding of technology stocks. Click here to check out our next lesson, on energy stocks.

By Jonah Keri
Jonah Keri is a trader and analyst who spent 11 years at Investor's Business Daily covering the markets. He now writes about stocks, cryptocurrencies, and other investments for Invezz and about emerging technologies for private clients.
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