Before getting right into the technology sector, let us understand where this sector lies in the stock market. Since the stock market is pretty huge in size, stocks are typically classified based on their market cap and the sector they belong to. This simplifies the tracking of different stocks in the market. Also, there are indexes for each sector, which helps in determining their performance.
We are in an era where technology is advancing massively. People are focusing more and more on the development of technology. Therefore, we can say it’s quite necessary to have some basic understanding of this sector. In the following sections of the article, we shall be discussing, the definition of the technology sector, investment opportunities, risks involved, and the different means to invest in this sector.
What is the Technology Sector?
The Technology Sector includes companies that are involved in the research, manufacture, and development of technologically based goods and services. These are the businesses that manufacture electronic products, develop new software, computers, and any other product related to Information Technology(IT). These companies offer a wide range of goods and services both to consumers and businesses. Technology companies focused on consumers are involved in the production of mobile phones, computers, smart watches, home appliances, television, network devices, cloud services, and many more. Companies such as Facebook and Twitter use big data to monetise their free services to customers. Amazon, besides selling almost everything online, it provides users and companies with cloud services. On the other hand, companies from this sector have a lot to offer to the businesses as well. The tech sector develops and provides the businesses enterprise software, secure their databases, and manages their logical systems, assists marketing using big data and expert systems, and provide cloud solutions and space for web content.
The makes up of the Tech sector
The tech sector is an extensively diversified sector. Initially, the tech sector included companies which were only engaged in the production and development of semiconductors, computing hardware and communication equipment. As years passed by, the software companies expanded drastically and made its entry in the tech sector. Soon after, the internet companies began to boom, which made its way into the tech sector as well. One could argue about the non-existence of companies that manufacture computers, laptops, wearables, etc. Well, this is included in the hardware subsector. To sum it up, the tech sector is broken down into four mega subsectors – semiconductors, hardware, software, and networking and the internet. And, these subsectors can be further broken down as well.
An overview of investing in Tech stocks
The technology sector has tons of investment opportunities. This sector is the single largest segment of the market. It is larger than the financial sector and the industrials sector as well. The technology Sector is highly dynamic, with a growing demand for invention and innovation, always making room for new products, services, and features.
As, already said, there are four large subsectors in the tech industry: Software, hardware, semiconductors, and network and internet. Let us understand how each subsector has made its impact on the industry.
In this modern world, the whole country could come to a pause without the availability of software technology. From the smallest to the largest components, there is software embedded into it. This makes it a very demanding subsector. As far as the stocks are concerned, they are usually cyclic, i.e., they go with the flow of the economy. They often outperform when the economy is doing well, and underperform during the recession times.
Unfortunately, the hardware sector does not get as much respect as the software sector receives. However, the hardware sector is an important piece of the technology world. The software sector is developing at such pace that it is progressively replicating the hardware components. This has created a misconception among the people that there no requirement of hardware technology in this software world. Software is only a “set of instructions,” and there must be a “medium” to process those instructions. Hence, this is where hardware technology comes into play. Therefore, one must understand that both are highly dependent technologies. Without hardware, there is no software, and without software, there is no efficient use of hardware.
The Semiconductor industry is a colossal industry on its own. Almost all physical components depend upon the semiconductor chips. Also, it is needed by the software industry as well. The software in an item is useless until a semiconductor chip is embedded into it. Semiconductors find large applications in microprocessors, microcontrollers, amplifiers and sensor. Although semiconductors are omnipresent, the sector is highly sensitive to the economy. In other words, this industry is extremely cyclic.
Network and Internet
The Network and internet industry is the largest innovating industry among the rest three. The creation of networking technology has significantly enhanced efficient communication within companies. And, the introduction of the Internet has taken commerce to a whole new level. Also, in recent years, there has been an invention of new technologies as such as mobile banking and software as a service (SaaS). In addition, e-commerce companies are surging the industry. However, this industry requires hardware and software for its implementation.
Reasons to invest in the Technology Sector
- It is not always complicated to choose a tech stock: It was said by Warren Buffet that tech stocks are quite complicated to understand. However, companies doing exceptionally well in the business, like Apple and Facebook, are relatively simple to choose from.
- High growth opportunity: If the tech companies do exceptionally well in the business by offering high tech products and services to the consumers, they can experience continued growth as they gain market share, and eat up their competitor’s revenues.
- Evolution leads to maturity: Tech stocks cannot skyrocket always. They eventually mature at some point in time. They begin to focus more on dividends buybacks than expecting high returns. By this, the return becomes steady and stable, volatility decreases, and become more safe and reliable.
Why shouldn’t one invest in the tech stocks?
- Tricky – Most of the tech stocks are quite tricky to understand. As Warren Buffett says, never get into businesses that are complicated to understand. There are several other sectors and stocks; hence, an investor can prefer other sectors than the tech sector.
- Relatively New – Also, most of the tech stocks are new to the industry. This again makes it difficult for the investors to choose a reliable stock for their portfolio. Moreover, investors are unknown to the performance of the stock during a market slump. Therefore, again, it is recommended to prefer another sector rather than risking in the tech stocks.
The Best Technology ETFs
The tech sector is usually considered as one of the hottest sectors in the industry. Since understanding the tech stocks is quite complicated, one can consider investing in an Exchange-traded fund.
Some of the best performing ETFs
Technology Select Sector SPDR Fund
Vanguard Information Technology ETF
Communications Services Select Sector SPDR Fund