Technology industry is the sector in which the largest growth has been observed over the past years. Thinking about investing in shares, many traders are turning towards new technologies, sensing intuitively that it may earn them the largest profit. What are the rules of investing in technology? What should you know about investing before buying your first shares?
- Technology industry consists mainly of “growth” companies. Division of businesses into “growth” and “value” companies is the basic distinction when it comes to investing in securities. “Growth” companies are development-oriented businesses. The prices of their shares are rising relatively fast, but due to ongoing investments in their development, such enterprises pay very low dividends. “Value” companies are already established on the market and not experience rapid growth. They also tend to pay much larger dividends than “growth” company. It is assumed that “growth” companies are better for short-term investments, in order to sell their shares quickly, while “value” companies are long-term investments. Naturally, the nature of “growth”-type investments is riskier than that of “value”-type investments. If you put your assets in technologies, we assume that you invest in “growth” – only a few technology companies are permanently established as “value” businesses, which is due to very rapid shifts on the new technology market.
- Avoid companies known to often change their top executives. Third CEO within half a year? This does not bode well even for the most promising business ideas. Remember that companies are managed by people – if people from the top managed are not trustworthy or knowledgeable enough to run their business, the company will inevitably start to decline in value.
- Invest only in shares of companies that have a large advantage over their competitors. There are two ways to gain such an advantage. The first one is to build a brand and become recognisable – such a company may sell more products than its competition, even if the quality of their products is worse. The other one is to launch a product that is innovative or far better than competitors’ offers. However, it is always better to choose small companies that try to fill a niche with innovations rather than medium enterprises that attempt to challenge business giants only by improving existing products. There is one exception to this rule: shares of the best-earning companies that can easily tip the balance between better and worse products at any time.
- Follow shifts in customers’ needs. Supply is conditioned by demand, and it is in the technology industry that the demand shifts most often. If a company finds a small niche to fill in – for instance, the need for sonic toothbrushes or new mobile games – it is enough for becoming globally successful.
- Remember to diversify your portfolio. This is a rule that you should stick to in any type of investment. Do not rely on one company only – choose between three and five businesses and follow their development. If one of them goes bankrupt, you will still be able to cash in on the other ones.
- Learn to manage risk. This is particularly about learning to define how risky a certain investment is and whether the expected profit is worth taking such a risk. Less risky moves often warrant smaller but safer profit, but the correlation between the risk and return on investment is not always that straightforward. If you invest in cheap shares of a collapsing company, earning a profit remains somewhat likely, but a loss is almost certain.
- Always check the debts of the company whose shares you are buying. In practice, almost every large technology company has a credit facility. It is crucial that it does not exceed 25% of the company’s value; some experts even claim that it should be only between 10% and 20%. We also recommend that you check the company’s sources of financing, especially in the case of start-ups.
These are seven recommendations for investing in technology. As has already been mentioned, the technology market is growth-oriented and tends to change dynamically, but at the same time, it is one of the most profitable sectors and a vast majority of key traders invest their capital in technology. This shows how promising this market is and how sensitive it is to any changes.