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How to invest in tech stocks

If you want to invest in tech stocks the first thing you need is an account with a Stockbroker. In this guide, we will run through the pros of cons of investing in tech stocks, what tech stocks are and how to buy and sell them.

1. Why invest in tech shares?

For the past three decades, the world has been transformed by the Digital Revolution. Underpinning this revolution was technology. It is no exaggeration that we are living in one of the fastest-changing epochs in human history.

From IBM to Microsoft to Google to Facebook, waves of revolutionary technology products are shaping how we live, communicate, and work. From these enormous changes seams of wealth opportunities are created for astute entrepreneurs and investors. The 2020 pandemic has accelerated some of these trends.

As we speak, the three richest men in history all sourced their wealth from technology; Bezos ($190b+, Amazon Inc), Gates ($125b, Microsoft), and Zuckerberg ($110b+, Facebook). Every month some new tech firms 'strike gold' as their products take off.

Therefore, investors should - and must - participate in this technology revolution. Even the 90-year old Warren Buffett, who previous shunned the fast-changing technology sector, now holds a $124 billion equity stake in Apple (AAPL).

2. Five Things To Know About the Technology Sector

First, the 'tech' sector encompasses a broad range of companies and subsectors. From pure software companies to payment processors to telecommunication firms. Some firms like Microsoft and Apple are worth trillions of dollars; some just tens of millions. Some firms are literally 'Platform Companies' that dominate certain sectors (e.g. Amazon); some are one-in-many competitors. New trends within the technology area include:

Tech subsectors

  • Artificial intelligence and deep learning
  • Chips and processors
  • Cloud computing
  • Blockchain
  • Cyber-security
  • Media
  • Robotics, etc

Second, the biggest tech ecosystem is located in the US, in particular, Silicon Valley. Many famous tech firms were founded there. The nearest competitor to the US is China. The country has the largest population, a fast-growing economy and unsurprisingly, a vibrant tech ecosystem. Tencent (700.HK) and Alibaba (BABA) are two of the biggest tech companies in the world. Europe has SAP (SAPX).

Third, the tech sector is fast changing. Many new products are launched every year. Sometimes we see real breakthroughs which can render current products obsolete, even though we don't realise it yet then. One such product was the iPhone 3 launched 2008. Two years later, Nokia the former handset leader was on the verge of extinction. Market leadership can change suddenly.

Fourth, tech stocks are hugely volatile. The huge returns there are accompanied by massive risks. Many tech firms do not make it. Bankruptcies are common. During the 2000-2003 tech crash, numerous dot-com stocks plunged by 99%. Even Amazon Inc then slumped from $400 to single digit. But such volatility is good for traders who attempt to market time tech stocks. Beware of the risk.

Fifth, many tech stocks do not pay dividends. In fact, many are not even profitable. During a bull market, this is ignored by investors because they focused on capital returns. The lack of dividend can impeded overall returns over the years. Therefore, the tech sector may not be suitable for every investor.

3. How to invest in tech shares

There are three primary ways to ride the tech sector.

The first is to buy and hold tech shares directly. For UK investors, you can do that via your stocks and shares individual savings account (ISA, see GMG's guide on ISA Accounts). I list some of the biggest tech names in the US (see Table below).

Currently, the biggest tech stock is the $2 trillion Apple (AAPL), which created a integrated tech system that include wearables, PC, phone, and software. Other trillion-dollar companies include Microsoft, Amazon and Google.

The second way is to do it is via a diversified fund, such as investment trust (see GMG's Guide on Investment Trust). In the UK, the biggest tech-focussed trust is the £14-billion Scottish Mortgage Investment Trust (SMT). Other tech IT that are popular includes the Polar Capital Tech Trust (PCT) and Allianz Technology Trust(ATT).

The last way is via an exchanged-traded fund (ETF, see GMG's Guide on ETF). The beautiful thing about ETF is that it follows a well-defined index, such as the Nasdaq 100 Index. So you don't need to worry about shifting stocks over time. One of the biggest tech ETF is QQQ (QQQ), which tracks the largest tech firms in the US. Another one is iShares Technology (XLK).

There are many specialised tech ETFs. For example, First Trust ISE Cloud Computing (SKYY) focuses on cloud computing companies whilst iShares Trust Semiconductors (SOXX) holds a portfolio of semiconductor companies.

For investor, the first question is what 'edge' do you have? The tech sector is rapidly changing. You would have to keep up with the developments to know which sector is hotting up.

The second question concerns risk appetite. For many investors it is best to hold a diversify portfolio rather than risking all in the tech sector. The last question is about when investor should start buying and selling. There is no standard answer to this because it is different for every one. One way is via technicals such as moving averages. (see GMG's Guide on Technical Analysis)

4. Is the tech sector a bubble?

For many investors the biggest concern about investing in tech stocks is this: Are tech stocks a giant asset bubble waiting to collapse?

The rally from March lows is staggering. Look at Zoom (ZM) and Salesforce.com (CRM). New highs after new highs. This is despite the fact that the global economy is contracting at the fastest pace in modern history.

Fans of the tech sector point out that (bulls' case):

  • Tech's earnings are less cyclical than before
  • Tech firms are morphing into 'platforms' which give them scaling power and network effect that are harder to break into
  • Tech firms can grow without much additional capital. In fact, many tech firms are cash rich

However, sceptics point out that (bears' case):

  • The sector's rally is unsustainable over the long term
  • The representation of tech firms in stock markets is huge. If prices rise at the current pace, in the end the market would be dominated entirely by a few tech stocks
  • Valuation of the tech sector is rising fast and may not unsustainable over the long term
  • Post-IPO rallies are strong - a sign of speculative sentiment

In the seventies, the Nifty Fifty were assumed to have huge and unassailable 'business moats' that would last for generations. Prices soared on this basis - only to collapse when the bear market hit. Many are looking at these FAANGs and felt the same way.

Last week, I pointed that the March-August stock rally is likely driven by the Fed's $3 trillion QE. (LINK) Therefore, if the Fed continues to add reserves at this rate, prices may even exceed the bulls' case.

A partial list of the world's largest tech stocks:

  1. Apple (AAPL) $2.13 tn
  2. Microsoft (MSFT) $1.73tn
  3. Amazon (AMZN) $1.70tn
  4. Google (GOOG) $1.12tn
  5. Facebook (FB) $836.6bn
  6. Alibaba (BABA) $781.93bn
  7. Tencent (007.HK) HK$5.18tn ($668.bn)
  8. Tesla (TSLA) $412.5bn
  9. Nvidia (NVDA) $324.5bn
  10. Verizon (VZ) $254.3bn
  11. Adobe (ADBE) $247.7bn
  12. Salesform.com (CRM) $244.3bn
  13. Paypal (PYPL) $240.1bn
  14. Netflix (NFLX) $231bn
  15. Intel (INTC) $214.48bn
  16. SAP (SAP.GER) Euro170bn ($204bn)
  17. Cisco (CSCO) $178.2bn
  18. Broadcom (AVGO) $138.9bn
  19. Qualcom (QCOM) $133.4bn
  20. Texas Instrument (TXN) $131.4bn
  21. IBM (IBM $111.4bn
  22. Advance Micro (AMD) $100.4bn
  23. ServiceNow (NOW) $93.6bn
  24. Intuit (INTU) $90.6bn
  25. Zoom (ZM) $84.4bn
  26. Bookings.com (BKNG) $79.7bn
  27. Square (SQ) $69.2bn
  28. Dell (DELL) $49bn
  29. DocuSign (DOCU) $39.5bn
  30. Twitter (TWTR) $32.5bn

(Based on share prices Aug 28, 2020)

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