Technology has shaped the world as we know it today. Technological advances like the invention of the microchip, the rise of personal computing and the internet have changed our everyday lives, the way we communicate and do business. Given that technology now plays a major role in almost every aspect of our lives, is the technology market a good place to invest your money? In this article, we’ll drill down into the tech market and give you all the information you need to start trading in technology stocks.
In the stock market, the definition of the term ‘technology’ itself is incredibly broad and can cover everything from smartphones to semiconductors, electric cars to software developers. Because of this diversity, trading in technology stocks can seem like a daunting prospect for new investors. Many people may also remember the dot-com bubble crash of 2000 and 2002 where tech investors lost a fortune. Since then, however, tech stocks have become one of the highest performing and most profitable sectors for equities available - so much so that the market value octupled between 2002 and 2019!
Understanding how the technology market is divided and what sectors are the most profitable is the key to successful technology trading. Generally, tech stocks are divided into five main categories: software providers, hardware providers, semiconductor manufacturers, internet information providers, and telecommunication companies.
Make sure you thoroughly analyse both the companies you are considering and how their market works. Trading entails speculating on price fluctuations while investing is directly buying shares in a company. You can start to trade or invest in tech stocks by using an online trading platform run by a brokerage firm.
Most new investors in the technology market choose to open an account with an online broker. These days, there are thousands of online brokers that promise investors high returns and little risk, but often they do not have the experience to back up their claims. Investors need to be diligent when researching a broker, so make sure you investigate whether the firm is reputable and trustworthy. Always check whether a particular broker is insured and overseen by the appropriate regulatory bodies and if it has a proven track record in the industry.
Once you have found an online broker that you can trust, then the next step is to research the companies you wish to invest in. As we have mentioned, the technology market is incredibly diverse, so it can be easy to feel overwhelmed by the number of investment opportunities. The easiest way to start to invest in the tech market is to simply choose companies that you already know. Microsoft, for instance, is a continuously high performing company that most people will be familiar with.
Then, it's down to choosing the way in which you wish to trade.
So, you have chosen a broker and opened an account and you have also chosen a company – or several companies - that you wish to invest in. The last step is to decide how many shares to buy and to familiarise yourself with the terminology used when trading.
The best option is to start slowly, even with just a single share, and build your portfolio as your confidence grows. Learning the basic order terms used in stock trading can take time, but you can simply choose to focus on the most straightforward order types.
Nowadays, there is also the option of buying Stock CFDs without buying the actual shares. CFDs will give you the possibility of making profits in the short term by speculating on price movements in the short term. When trading Stock CFDs, you can also making use of leverage.
A common term you may come across when learning how to trade is ‘leveraging’. Leveraging can be a powerful tool but does involve a degree of risk. To make a leveraged trade, an investor will borrow part of the funds they use to trade from either a brokerage firm or a banking institution. This gives the investor greater purchasing power and enables them to maximise their profits should the trade be successful. The danger is that the investor may lose not only their initial investment but also be liable for the borrowed (leveraged) amount.
Are tech stocks profitable? Technology stocks have recently been one of the highest performing equities in the marketplace. The increasing reliance of both private individuals, governments and industries on technology means that the value of tech stock has skyrocketed in the last year. Smart investors can find ways to make good profits via technology stocks if they choose wisely.
It can be expensive to buy into the big-name players, so investors can choose to purchase fractional shares instead. Diversification is simple in the tech market, which also increases your chances of making good profits.
The best tip that we have for investors who want to get started in the technology market is to do your homework. Research is absolutely fundamental to making good profits in whatever tech sectors you choose to invest in. It helps to have a good understanding of what a company actually does, for instance. Many tech start-ups have high stock prices as the market expects their products to be successful. However, emerging technologies can be incredibly complicated and often fail, so many companies can be overpriced due to unrealistic hype. Do your research thoroughly.
The technology market can be volatile. Many factors can cause sudden price fluctuations and these movements are often difficult or even impossible to predict. The rate of technological innovation and development can occur at a blistering pace, so obsolescence can happen quickly. What's hot today can quickly become old news by next week. Political events can severely disrupt the tech market. A government that decides to invest in technology or initiates proceedings against a tech company can send prices soaring or crashing. Consumer trends and fashions also have a dramatic effect on the market.
There are many different trading styles and strategies that can be used in the marketplace. Investors should choose the right ones to suit not only their financial goals but also their personal circumstances and temperament. If you are a naturally cautious person, then a short-term style that has a high chance of profitability but also carries great risk may not be the best option. Likewise, if you are keen to experience the excitement of making risky trades and can absorb losses, then a long-term and more cautious investment style may not be to your liking.
Once you have settled on a suitable trading style, there are a number of trading strategies you can employ. A ‘news trading’ strategy involves making trades based on news releases, taking into account how events are reported and their impact on the market. An end-of-day trading strategy requires you to wait until the market is almost closed before you make any trades, thus taking advantage of settled prices. ‘Swing trading’ involves analysing trends and trading when stock prices rise and fall. Traders buy when prices are low and sell when they are high.
Should you go 'short' or 'long'? It is important to have a full understanding of what these terms mean. Put simply, a long trade is buying a stock with the intention of selling it in the future for a higher price. However, the concept of short trades can be confusing for new investors. In stock market terms, a short trade is the act of selling a stock before you actually buy it. The intention is to buy the stock back at a future date at a lower price and thus make a profit.
Stops and limits are always important. Stop orders and limit orders are used to curtail the element of risk involved in trading and avoid losses. When a trader instructs a broker to make either a limit or a stop order, they are saying they do not want the current market price of a stock but they want their orders filled when the stock hits a predetermined price. A stop order specifies that a stock is traded at a less favourable amount, where a limit order is activated when the stock reaches a more favourable price.
Without risk, there's no profit. Only by managing risk can a trader ensure that they come out ahead. Some of the biggest risks that are unique to the technology market include over or undervaluation of any given company. Hype can boost prices before they crash when a venture is unsuccessful. Switching costs can be dangerous. This is where a company relies on a single software supplier but then has to change their supplier, sending their profit margins crashing. Innovation in the marketplace and consumer trends and backlash also make the technology market particularly risky.
There are many positive aspects of technology stock trading, among them the ample opportunities for diversification as the market is so broad.
The technology sector is expanding exponentially, so future growth is assured. However, the rapid pace of innovation, political events and unpredictable consumer trends can cause sudden price fluctuations. Hedging your investments by taking advantage of the opportunities to diversify is the best way to profit from technology stocks.