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Investing in information technology stocks
It’s a potentially lucrative market segment, but the competition is fierce.
The information technology sector spans a myriad of industries, from software startups to billion-dollar hardware providers. Before you invest, know what you’re investing in and familiarize yourself with the company’s key competitors.
What's in this guide?
- What are information technology stocks?
- How to invest in the information technology sector
- How is the information technology sector performing?
- Why invest in the information technology sector?
- What unique risks does the information technology sector face?
- Compare stock trading platforms
- Bottom line
- Frequently asked questions
What are information technology stocks?
Information technology (IT) stocks belong to the IT sector, defined by The Global Industry Classification Standards 11 stock market sectors — each named for a distinct slice of the market.
The information technology sector is characterized by companies responsible for the research and development of electronic goods and services. It houses some of the most recognizable names on the market, including Apple, Amazon, Google and Microsoft.
What subcategories does it include?
The technology sector is broken down into three major industry groups:
- Software. Companies that fall within the software industry include service providers connected to IT, data processing, search engines, systems software, home entertainment software and the Internet. Big names in this industry include Google, eBay, Amazon, PayPal and Microsoft.
- Hardware. Providers in the hardware industry include companies that manufacture communications equipment, PCs, cell phones, electronic equipment, transformers and point-of-sale hardware. Some of the biggest players in this industry are Apple, HP, SanDisk and Motorola.
- Semiconductors. A semiconductor is a piece of material — typically silicon — that conducts electricity across electronic circuits. Companies that manufacture semiconductors fall within this industry, including Intel, Microchip Technology and Texas Instruments.
How to invest in the information technology sector
There are two ways to invest in a stock sector: individual stocks and sector-tracking ETFs.
If you’d prefer to invest in individual companies and not the sector as a whole, stocks are your best bet. They tend to be more volatile than ETFs but can offer high-yield returns.
If you’re interested in following the entire sector, consider an ETF. ETFs are more stable than stocks and offer more exposure, but come with expense ratios that typically range from 0.03% to 2.5%.
To purchase stocks or ETFs, you’ll need a brokerage account. Here’s what to expect of the investment process:
- Compare platforms. With so many online brokerages to choose from, explore your platform options to find the broker best suited to your needs.
- Open an account. Applications for web-based brokerages can be completed online.
- Fund your account. Before you can begin trading, fund your account with a transfer from an external account.
- Pick your securities. Use a screening tool to filter your options by sector.
- Place an order. Once you’ve found a security you’d like to purchase, submit your order.
- Track your investments. Log into your brokerage account to track the progress of your investments.
What stocks are in the information technology sector?Select a company to learn more about what they do and how their stock performs, including market capitalization, the price-to-earnings (P/E) ratio, price/earnings-to-growth (PEG) ratio and dividend yield. While this list includes a selection of the most well-known and popular stocks, it doesn't include every stock available.
What ETFs track the information technology sector?
Popular ETFs that track the information technology sector include:
- Fidelity MSCI Information Technology Index ETF (FTEC)
- First Trust ISE Cloud Computing Index Fund (SKYY)
- First Trust NASDAQ CEA Cybersecurity ETF (CIBR)
- First Trust Technology AlphaDEX Fund (FXL)
- Global X Cloud Computing ETF (CLOU)
- iShares Expanded Tech-Software Sector ETF (IGV)
- iShares PHLX Semiconductor ETF (SOXX)
- iShares U.S. Technology ETF (IYW)
- Technology Select Sector SPDR ETF (XLK)
- VanEck Vectors Semiconductor ETF (SMH)
- Vanguard Information Technology ETF (VGT)
How is the information technology sector performing?
The graph below tracks how the Technology Select Sector SPDR ETF (XLK) has performed over the last five years. Tracking ETF performance can offer insight into how a stock sector as a whole is performing.
Why invest in the information technology sector?
There’s no way around it — information technology is an exciting space. Investing in the tech sector offers investors the opportunity to buy shares in real-world tech they use everyday. And the sector is so comprehensive that there’s plenty of room to diversify, whether you delve into hardware, software or semiconductors.
If you can afford it, you can opt for one of the tried-and-tested blue chips, like Facebook, Google, Microsoft or Amazon. The problem with these tech monoliths? Not all pay dividends.
Though some companies in the tech sector give back to their investors, some investors get into the tech industry for a different reason: growth potential.
Technology is the largest segment of the market. With a solid grasp of the company you plan to invest in and its competitors, a nimble investor has the opportunity to make money in the tech sector by investing in small companies on an upward trajectory.
What unique risks does the information technology sector face?
The excitement that punctuates the technology sector gives way to fierce competition — a competition that fuels company acquisitions. Software tends to do well in a bull market, but during an economic downturn, companies can fold overnight. The opportunity for profit in the tech sector is accompanied by volatility — and this volatility has the potential to tank investments and cripple portfolios.
The tech sector is also vulnerable to government jurisdiction, as evidenced by the European Union’s General Data Protection Regulation. Facebook was pulled in front of Congress, demonstrating that tech giants aren’t immune to regulation. Investors need to keep their finger on the pulse of the news to stay ahead of potentially damaging economic and political events.
How do mergers and acquisitions affect tech stocks?
Mergers and acquisitions can occur in any sector but are especially common in the tech industry. Mergers can trigger volatility within the sector, both for the companies affected and for competitors.
If you own stock in a company that’s acquired by another company, one of three things may happen to your shares:
- All-cash deal. Your shares disappear from your account and you’re reimbursed with cash.
- All-stock deal. Your shares disappear from your account in exchange for shares of the purchasing company.
- Combination deal. Your shares disappear from your account and you receive a combination of cash and stock of the purchasing company.
When acquisitions occur, the companies announce the deal and shareholders can vote to approve the deal. Acquiring companies are typically willing to pay more than the asset’s current market price to encourage shareholders to approve the deal. Once approved, regulators clear the deal.
What does this look like in real life? Back in 2016, AT&T acquired Time Warner. Time Warner shareholders were offered a combination deal valued at $107.50 per share. In exchange for their Time Warner stock, shareholders were given $53.75 cash and $53.75 in AT&T stock.
If you receive stock of the purchasing company during an acquisition, you’re not required to keep it. Shareholders can sell their shares at any time.
Compare stock trading platforms
These accounts let you invest in stocks and ETFs that track the technology sector.
The information technology sector offers investors the opportunity to back the hardware and software they use everyday. It’s an exciting field but it’s prone to volatility — especially during a down market.
Explore trading platforms for the account best suited to your investment needs.
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