Tech stocks seem like the embodiment of temptation for beginner investors. They seem to yield impressive returns and have spearheaded the 21st century’s historic bull market, easily topping the returns of the S&P 500.

Five of the top constituents of the S&P 500 are tech companies. Amazon, Alphabet (Google), Apple, Facebook, and Microsoft, have made thousands of investors rich, and they continue yielding impressive returns. Had you bought almost any high-profile tech stock ten years ago, you would’ve made quite a bit of money off it.

Beyond these obvious reasons, why are tech stocks so popular with investors?

Why Should You Invest in Tech Stocks?

Tech stocks are in a category of their own when returns are concerned. Although they feature higher risk than other market segments, they carry potentially higher rewards as well.

In addition to that, they seem impervious to some of the market shocks that can absolutely upend other stocks and commodities. The top tech stocks have weathered the Covid-19 crisis without flinching. The tech sector was the first to recover from the Covid plunge to pre-crisis levels and beyond.

Given that they are future-oriented, tech stocks reap the benefits of every major crisis and disruption. Instead of hamstringing the tech sector, the global pandemic accelerated digital trends, driving people and workers online. Technology dominates our lives and economies. It impacts every aspect of production and consumption in one way or another. It is here to stay and is already impossible to circumvent.

The Advantages of Tech Stocks

  • Tech stocks boost risk and returns. Tech companies tend to be fast growers.
  • The tech industry thrives on innovation. By owning tech stocks, investors can cash in on potential breakthroughs and disruptive technologies.
  • Indexes love to incorporate tech stocks.

The Disadvantages of Tech Stocks

  • Tech companies may face disruption from competitors.
  • Tech stocks barely pay dividends. They make poor passive income sources.
  • Blue-chip tech stocks may not yield as much growth as smaller, riskier startups.
  • The quickly shifting regulatory environment can sabotage tech stock gains.

How Do You Find the Right Tech Stocks for Investment?

The tech sector is the playing field of large, established companies and fresh startups. Someone may think of an innovative software solution to a problem, and in a couple of months, an organization may spring up around the idea, its share price soaring and its market capitalization skyrocketing.

That said, many promising tech initiatives may turn into fiascos. How can you, as an investor, tell which stock to buy and which to ignore?

The large, blue-chip stocks of the tech industry are safer bets than any startup, although their returns may not match those of a startup that goes on to be wildly successful.

Facebook, Amazon, Apple, Netflix, and Google make up the so-called FAANGs. Microsoft and Nvidia are solid tech investment bets as well. Tech companies with large market caps are good investments for a couple of reasons:

  • These companies have impressive track records of revenue and stock price growth. They are well capitalized and likely to continue performing well.
  • Unlike startups, these companies boast solid fundamentals. Everyone knows their products and their competitors. The market growth potential of the products and services they offer is solid.

To understand why investing in FAANGs is a better decision than gambling on a company with shoddy fundamentals and dubious growth potential, it makes sense to compare Amazon to Tesla.

It is not farfetched to assume that the former will dominate its market sector for years to come. No one can objectively say the same about the latter, however. The electric car market features many potent competitors, and Tesla’s place as a market-leading entity is far from guaranteed. Its products may not be able to keep up with the competition either.

How Can You Buy Tech Stocks?

Investing in individual tech stocks is always an option. When an investor understands the fundamentals and products of a company, its stock can be an attractive investment vehicle. The problem with this approach is its lack of diversification.

To address diversification, investors can use ETFs or mutual funds instead of investing directly in companies.

An ETF or mutual fund has many constituents, much like the S&P 500. By investing in such a fund, investors gain exposure to a wider range of company performances. This allows them to take calculated risks. If one of the constituents fails and its share price falls, another can make up for it.