A Beginner’s Guide to Investing in Tech Stocks

Featured article by Sure Dividend

The benefits of investing are endless. Many people are put off by the prospect of giving their money away and getting nothing for it right off the bat, but that’s the wrong kind of thinking to have about investing.

If you’re smart about it, you can see some serious long-term returns, set yourself up for retirement, guarantee yourself an extra source of income, and there are many more advantages too.

In 2019, one of the most reliable industries to invest in is the technology industry. It’s constantly evolving, meaning there are new specific areas open for investment and technology as a whole is becoming increasingly important.

There is more and more money to be made and that’s only going to get bigger. There’s no better time to invest than right now. You invest now, the industry grows, and you become richer and richer.

That said, investing is a bit of a risky game, especially if you’re new to it and you don’t really know what you’re doing. You could invest in the wrong company and end up losing money or you could invest too much or too little.

For the tech industry, where you’ve got a lot of startups, some of which will do exceptionally well and some of which might flounder, you need to be extra careful. Let’s have a look at the industry and see what the tools for success are:

The Industry

Now to make money by investing in the technology industry, you first need to understand the inner-workings of the industry. What stocks fall into the category of tech stocks and what the companies behind these stocks actually do.

A tech company can refer to a few different things. We’ve got software providers, which are the companies responsible for writing the code that allows computer programs to run. Microsoft is still the biggest and most reliable software stock on the market and other major players include Intuit and Symantec.

On the other side of the coin then there’s also the hardware companies.The distinction between these two is pretty simple to understand. Hardware companies create physical pieces of technology equipment. The computers themselves as well as modems, routers and other necessary electrical equipment. We’re looking at companies like Rezar and Cisco here.

Two very different types of company but both of them are integral to the tech industry and each of them will be worth investing in going forward. We’ve also got something like telecommunications to consider.

Major phone networks and internet service providers would fall into this category. While the major hardware and software companies have been around for many years, telecommunications as we know it is dominated by relatively new faces such as Verizon and Comcast.

And then we have information providers, the companies that are responsible for compiling information online and making it accessible to the public. The most significant boom period in tech stocks has happened with these companies in recent years. We’re talking about the likes of Google, Yahoo and Facebook in this category.

So how do you decide what to invest in? Here’s what you should consider:

Think Ahead

Investing in a company that is making a lot of money right now is not necessarily the best way to ensure that you will see long-term returns from your investments. The key is to invest in something that you are confident will be making money in the future.

You can look at the big choices such as Microsoft and Google, but they might not be the companies that are going to continue to grow and generate more earnings for their investors. They are already very profitable.

This means that many people are going to be choosing them as their primary investments and as such, the stock will be expensive and probably not worth it in the long-term. You would be better to look at companies that are on the rise.

Companies where it’s evident that there is an interest in what they are producing but also that they haven’t completely blown up yet to the point where everybody is buying their stock. It can be hard to decide on the right stocks, even with this method.

A company seeing increased earnings, is not a guarantee that this will continue to increase in the future. You need to consider obsolescence risk. This is the possibility that the product will become obsolete in the future.

It might seem very useful and valuable right now, but it could be replaced by a better technology in the not too distant future. You need to do research on the industry to see if you can determine the likelihood of this happening.

See what other technologies are in development right now, which may prove to be a problem for the supposedly worthwhile investment that you’ve found. It will be tough for a beginner to analyze these kinds of trends.

I would suggest looking for the help of an investment advisor, who will be familiar with how the market tends to fluctuate and could effectively predict which tech shares that are growing right now will continue to grow. That said, it is worth knowing the metrics yourself:

Know the Relevant Metrics

If you haven’t heard of an Economic Moat before, it’s essentially what the competitive advantages a specific company has over their rivals are. The term was coined by Warren Buffet and in terms of tech stocks, think of it in these four terms:

The first is the cost of switching. Generally speaking a company will want to try and lock their customers in and make it difficult for them to switch to a competitor. Often this will happen by way of some kind of contract.

A company that has a high switching-cost may not be enticing to customers long-term, even if it is a reliable company. You should keep an eye on it to see if it’s increasing over time as that could affect the company’s share performance.

The next moat is the network effects. This refers to the reliance of a specific company on other people being a part of it. Take a social media site for example, the network is important in this case because the service is to connect you with other people.

This isn’t possible if there aren’t people to connect you with. Then we have the cost of production, with a company having an advantage if they can deliver a product that’s of equal or higher value to their competitors for less cost.

And then there are also the intangible assets such as overall brand value and any trademarks or patents that the company might have. Each of these things will factor into the stock’s market performance so know them and know how your investments perform.

Build A Portfolio

A good strategy to have at first is to build yourself a portfolio of a variety of different stocks, and have a certain amount of money put towards each one. A portfolio of 6-8 different stocks would be a strong number.

Have investments in a few of the larger ones like Google and Microsoft. Ones that you know are going to continue being profitable no matter what and even if you don’t make massive returns, you can be confident you won’t lose money.

And then pick  a few more that will come with a bit of a higher risk. Some startups maybe that you and your financial advisor think could be major players in the future. In these ones ultimately fail, you can fall back on your larger investments for a while.

And if they succeed, then you will eventually reach a comfortable point where you are getting a high Return on Investment from shares which started small. It will cost more initially but it gives you that extra bit of security.

My final piece of advice is to be patient. And that doesn’t even just apply to beginners. Patience is essential all throughout your investing venture. If you’ve been careful about what you’ve invested in and you are making smart, well-researched decisions, you will reap the rewards soon.