Investing in Tech Stocks

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Often, investors hoping for a windfall turn to tech stocks as a sure fire route to riches. However, sometimes tech turns out to be a wilder ride than they might have expected. As a group, tech stocks can be very volatile. Stocks may rise high and fast one day. The next day the company may be gone or near death. Many tech stocks offer reasonable growth and predictable dividends. The trick is predicting which stock will fall in to a particular group.

A Wild Ride

Tech is difficult to predict. That doesn’t mean that every tech stock is risky. It simply means you need to select tech stocks that match your goals and risk profile. Startups in particular may be more unpredictable than the sector as a whole. Startups may also offer the greatest returns in the market.

By its very nature, tech will include many startup companies that are on the cutting edge of their fields. They may have a promising idea or product. But sadly, not all promising ideas pan out as expected.

Perhaps the idea turns out to be unworkable. Sometimes a competitor beats them to market with a similar product. Frequently, the idea just doesn’t catch on with consumers or potential users. At times, the product turns out to be a solution in search of a problem that doesn’t exist. In that case, there is no viable market for it. You need a willing market to ensure success.

These are all factors that make tech investing a wild ride for investors. Be sure you are up for the ride before you jump in. Learn about the tech space.

Two Types of Tech

Tech consists of two types of companies. The survivors are companies whose financial profiles closely resemble leaders in any other industry. These companies include well-known names such as Microsoft, Intel, Apple, Google and Amazon.

The other type of tech company includes names you’ve never heard of. When investors do hear of them, many say, “Why would anyone want that?” Or sometimes they say, “I wish I had put my money in them before they made it big.”

You can't predict the future. A company can seem to have it all and yet they still may fail. This is especially true in tech.

What Makes a Tech Survivor?

Tech includes many companies that continue to invent ideas. These companies lead their segments with new products. Intel is one company that continues to innovate.

They invest in research. IBM may be a lumbering giant in many ways. Even so, its research fuels new ideas that the industry adopts later.

Survivors continually reinvent themselves. Microsoft went from an operating system company to a desktop app provider. Now they’ve plunged into hardware, mobile devices, game platforms, business systems and cloud. Microsoft is always searching for new markets to enter.

Tech survivors have a finger on the public’s imagination. So far, Apple can do no wrong when it comes to consumer devices. People line up for days in advance to get their hands on Apple’s new products.

These companies are all tech survivors. That doesn’t mean that you will always make money by investing in their stock. It does mean that they are good tech companies to consider if you are risk averse. Just don’t forget that even a tech survivor like Apple may have a volatile stock price.

The Other Tech

Other tech companies seem to come from nowhere. Sometimes these companies make it into the survivor’s camp. Think of Twitter or AMD.

Other companies crash and burn quickly. Think of Wesabe or iParents. Those were great ideas that never quite made the jump to lasting success.

What to Look For

If investing in tech while holding the line on risk interests you, consider Google, Facebook, Oracle or any of the other companies mentioned in the survivors section. High-tech survivor companies are not limited to software or consumer electronics though. You can combine tech and other markets to find companies that offer the return of a tech stock with the safety of a less risky market.

For example, if health care interests you, consider medical device companies such as Medtronic or Johnson and Johnson. If manufacturing is more your focus, consider Stratasys or Cube who both make 3-D printers, the next big thing. The point is that you can combine tech and other market segments to get the benefit of both sectors.

If You’re Only Interested in a Startup

If your heart is set on winning a big pot of money from your investment, do yourself a favor and think about the main reasons why startups fail before you choose where to invest. Make sure that companies you choose to invest in don’t have these risk factors.

Companies started and run by a single individual fail more often than those run by a group of partners. Sharing company responsibilities provides checks and balances that may be missing with a single founder.

Look for market research that proves there is demand for the product. Sure, nobody knew they needed an iPad before Apple introduced it in April 2010. Today, hardly anybody can remember what it was like not to have a tablet.

But remember, Steve Jobs was a genius. Geniuses are few and far between. It’s unlikely that every startup has a similar genius at its helm. Do your homework before plunking down your cash.

Examine how the company used its startup funding. Did the funds go to research, developing prototypes and hiring the best people to bring the vision to market? That’s good.

If seed money went to big paychecks, fancy offices and gala launch parties, you may want to steer clear of adding your cash to the party fund.

No matter what your interest and your risk profile, by putting in the research time you can find a tech stock that will excite your imagination, provide a return in line with your goals and match your risk profile.

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