The technology sector has changed the world. For example, Google has become the best source of knowledge and information while Tesla has revolutionized the automotive industry. Fintech firms like PayPal and Square have changed how people send money.
As a result, technology investors have been rewarded substantially. The NASDAQ 100 index has outperformed other indices. It's easy to see how this sector has attracted the attentions of not only investors, but day traders as well.
In this article, we will look in short at what tech stocks are, the different types and how to trade them.
Tech stock definition
A technology company can be seen as one that uses various scientific knowledge and information to solve problems. For example, a company like Google uses science to rank websites while a company like Facebook uses science to connect people.
Some of the biggest ongoing themes in the technology sector are artificial intelligence, blockchain, machine learning, and metaverse. Artificial intelligence is the science that allows computers and other devices to do tasks that were done by humans. A good example of this is Google Assistant and Apple’s Siri.
The blockchain technology is involved in the decentralization of key sectors. For example, decentralized finance (DeFi) is an industry that removes the middlemen in dealing with key financial subjects. People can lend, earn, and do other financial things without having a middleman.
The metaverse is one of the fastest-growing industries in the world. It involves the creation of digital platforms where people can interact with their own avatar. For example, platforms like The Sandbox enables people to buy digital land and develop their properties.
Types of technology stocks
There are several types of technology stocks in the market today. Some of the most popular categories of technology companies are:
- E-commerce stocks - These are companies that facilitate payments through the internet using mobile applications and websites. Examples are eBay, Amazon, and Stitch Fix.
- Cloud computing stocks - These are companies that help individuals and companies store and handle files in servers stored around the world. Examples of the leading cloud computing companies are Amazon, Salesforce, and IBM.
- Social media - These are companies like Facebook, Twitter, and Snap that enable people to communicate with each other. These platforms can also be used in your trading strategy.
- Semiconductor - These are firms like AMD, Intel, and Taiwan Semiconductor that manufacture semiconductors that are used in computers and smartphones.
- Hardware - These are firms like Apple and HP that manufacture computers and smartphones.
Examples of top technology stocks
There are thousands of technology stocks in the market today. Here are some of the best ones that have done well in the past few years.
- Apple - Apple is the biggest company in the world. It manufactures hardware like the iPhone and iMacs. It also sells services like Apple News+, iCloud, and Apple Music.
- Microsoft - Microsoft is a major company that is best-known for its operating system and office applications. Its top products are Windows, Azure, and Dynamics.
- Tesla - Tesla is a company that is at the intersection of technology, energy and mobility (one of the leading company in EV).
- Facebook - It is the biggest social media company in the world. It owns products like Instagram and Whatsapp.
How to trade and analyze stocks
Technology stocks are usually ideal for both traders and investors. As you know, traders are usually focused on short-term movements while investors are focused on long-term price action movements.
To a large extent, trading tech stocks is similar to how you trade other stocks like finance, oil and gas, and materials. You will need to do three types of analysis: technical, fundamental, and price action analysis.
Technical analysis is the process of using charts to predict the future price of an asset. It involves looking at patterns and then incorporate indicators like moving average, Relative Strength Index (RSI), and the MACD.
Fundamental analysis refers to the process of looking at news and financial data in order to predict the future. For example, you can look at details like a company’s earnings and latest news to see how the shares will move.
Price action is a form of technical analysis that involves looking at charts and identifying patterns like triangles, head and shoulders, and wedge patterns.
» Related: Leading vs Lagging indicators
Trading vs investing in long-term tech stocks
As mentioned, trading tech stocks is similar to how you trade other financial assets. The difference comes when it comes to investing in tech stocks.
Investing is the process of buying and holding stocks for the long-term. On this, you look at things that will impact a stock in the next few years.
Investing in tech stocks is different from how you invest in other type of companies. This is because most tech stocks are usually new companies that are yet to become profitable. Therefore, to invest in these companies, consider the following.
First, look at a company’s market size. For example, a company like Amazon succeeded because of the large market size of the technology sector. Facebook became successful because of the large size of the social media industry while Google succeeded because of the size of the search engine industry.
Second, look at a company’s growth. Investors focus on the annual growth rate of a company. If the growth is rising, it means that the firm will likely keep doing well over the years. For one, many high-growth companies tend to be highly unprofitable.
Rule of 40
For software-as-a-service company, investors focus on something known as the Rule of 40. This rule adds a company’s annual growth rate and its operating margin. If the result is above 40, it means that the company is a good investment. Third, look at the company’s management and its growth strategy.
How to identify fast-growth tech stocks
The next question is on how you can find the best growth stocks. While most people know well-known companies like Google and Microsoft, the reality is that there are many tech stocks behind the scenes.
A good way of finding these growth stocks is to use screeners. A screener is a tool that helps you sieve companies based on several criteria. They are offered by companies like Yahoo, Investing, and Barchart.
You can use a screener to find companies that are having quick growth on areas like revenue, EBITDA, and profitability.
Tech stocks are some of the best-known companies today. You actually interact with tech stocks every day!
For example, you use products like Facebook, Twitter, and Uber. Indirectly, you use cloud stocks like Microsoft and IBM when you use most products.
External Useful Resources
- Cramer says anyone selling Big Tech stocks in premarket trading is ‘either a machine or an idiot’ - CNBC