Technology stock

Quick definition

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Updated: Jan 9, 2024

A technology stock is a stock of a company that researches, develops, or sells technology-based goods and services.

Key details

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  • A technology stock is a stock of a company in the technology sector that researches, develops, or sells technology-based goods and services to customers and other businesses
  • Technology companies often heavily invest into research and development with a view of future growth and this makes their stocks speculative and risky investments
  • Even though they carry speculative risk, technology stocks are often the most attractive to investors because they drive growth and trade at much higher price-to-earnings ratios than stocks in other sectors

What is a technology stock?

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The technology sector is home to companies that focus on the research, development, and sales of technology-based goods and services. The stocks of these companies are technology stocks.

Most technology companies invest heavily into research and development with a view of increasing innovation for long-term potential. Due to the speculative nature of this view, technology stocks carry risk for investors as you are often investing in potential rather than actual value.

This means that technology stocks often have much higher price-to-earnings ratios (a tool used by analysts to measure a stock’s relative valuation) than stocks in other sectors.

However, there is merit to the speculation as the American technology sector is home to some of the biggest companies on the market: Amazon, Meta (formerly Facebook), Apple, Google, Microsoft, Netflix, etc. T

echnology companies consistently doing well and increasing proof of the growth potential makes technology stocks appealing additions to investor portfolios.

What are the defining characteristics of technology stocks?

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1) They make cutting-edge products

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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

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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

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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

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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.

What are some examples of tech stocks?

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

1) Advanced Micro Devices (AMD)

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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)

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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)

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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)

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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.

Where can I learn more?

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To learn more about technology stocks, and other key financial concepts, check out our full course page. Our range of courses cover everything you need to know about stocks and investing

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Prash Raval
Financial Writer
Prash is a financial writer for Invezz covering FX, the stock market and investing. For over a decade he has traded spot FX full time while... read more.