Tech Investments – Should You Stay Away or Dive In?
Tech investments can be tricky. The technology sector is one of the most dynamic investment sectors worldwide. And technology touches every segment of the economy, whether we like it or not.
The opportunities for savvy tech investors are many. Above-average returns are frequent. The risks involved in tech investments are higher as well. Some investors need to add risk to their portfolios while boosting their potential returns and tech stocks are perfect for that purpose.
No One Can Ignore the Tech Industry
Every segment of the economy relies on technology to improve its efficiency, productivity, and profitability. Tech is ubiquitous. Even investors who want nothing to do with technology must tolerate some exposure to it.
The tech sector is a fast-evolving one characterized by ever-shrinking cycles of obsolescence. The competition is nothing short of rabid. Tech actors seem desperate to come out with the next best product, exploring every possible avenue of innovation.
From an investor’s perspective, the tech sector is treacherous, where winners and losers never hold on to their positions for long. Someone dominating the hardware sector now is little more than a target for competitors to overtake and leave in the dust.
The Sub-sectors of the Tech Industry
To make sense of how the tech industry works, it is useful to divide it into four sub-sectors:
Software is the invisible but ubiquitous factor that powers technology. Nothing works without it. Unlike hardware and other aspects of the tech sector, the cyclical nature of software is not as obvious.
As intellectual property, software is difficult to protect through copyright and patents. It acts as an equalizer among mega corporations, medium-sized businesses, and tiny startups. Anyone can create an innovative software solution and shoot to the top overnight.
The software sub-sector is fertile ground for new company formation and innovative solutions. The factors that influence competition mostly boil down to how software providers support their products after the sale.
Networking requires hardware and software, but it is large enough to stand on its own as a tech sub-sector. Its existence has set the stage for the technology revolution the benefits of which we are currently enjoying. And tech companies keep finding newer and newer applications for networking. Products like mobile banking and software-as-a-service keep pushing the boundaries of technology, creating new tech sub-sectors and investment opportunities.
The networking sector offers investors two choices.
- Business-to-customer operations harness the power of technology, putting it into the service of individuals.
- Business-to-business solutions focus on using technology to facilitate business between organizations.
Networking provides the foundations of the fintech industry and eCommerce. Without networking, there would be no cryptocurrencies, and the industry that surrounds them would not exist.
Hardware is the physical layer of technology. Although software increasingly intrudes into the realm hardware used to dominate, it can never completely supplant the latter. The hardware industry consists of many sub-branches, each rife with investment opportunities.
- Computers and peripherals
- Consumer electronics
- Networking equipment
- Technical instruments
Semiconductors are the building blocks of modern electronics. The companies able to cram the most transistors onto a silicone waffle can make more powerful microchips and sell more of their products.
A large part of the tech industry depends on semiconductors. Chip makers create digital, analog, and mixed-signal products that fulfill various roles. Microprocessors are at the heart of every one of the smart devices we use. Graphics chips make it possible to display videos and games in ever-increasing resolutions and definition.
Despite acting as the base layer of technology, the semiconductor industry is highly cyclical. Savvy investors can exploit the cycles of boom and bust, but for some, the volatility can be daunting.
What You Must Know About Tech Investments
Investments in the tech industry carry a higher premium than stocks belonging to other market categories. The volatility in the industry is higher, and the risks and potential returns are higher as well.
Getting tech investments right involves more guesswork. Since many startups have no history or reliable performance data, all investors can do is analyze markets, products, and gamble on the future.
To produce an investable edge, investors must focus on understanding products instead of companies. Knowing what a product does and how a competitor’s product stacks up against it is the only way to judge an investment opportunity in tech.