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Investing in telecommunication services stocks
The benefits and risks of investing in telephone, computer and Internet providers.
Telecom services are in demand and rapidly growing, but the sector is prone to volatility. Here’s what investors should know before pouring money into the telecommunication sector.
What's in this guide?
- What are telecommunication services stocks?
- How to invest in the telecommunication services sector
- How is the telecommunications sector performing?
- Why invest in the telecommunication services sector?
- What unique risks does the telecommunication services sector face?
- How to evaluate telecommunication companies
- Compare stock trading platforms
- Bottom line
- Frequently asked questions
What are telecommunication services stocks?
Telecommunication services stocks belong to the telecommunications sector of the stock market. In total, there are 11 stock sectors as defined by the Global Industry Classification Standard. Each sector contains a distinct slice of the market.
The telecommunication sector is made up of companies that facilitate global communication — think telephones, mobile devices and the Internet. While the industry got its start in the 1830s with the invention of the telegraph, it’s since grown to encompass telephones, radio, computers and more.
What subcategories does it include?
The telecom sector can be broken down into three primary sub-sectors:
- Telecom equipment. Companies that produce the hardware used for telecommunications, including computers, telephones, radios, transmission lines and transceiver stations belong to this sub-sector.
- Telecom services. Major players in the telecom services sub-sector include telephone service providers and cable companies.
- Wireless communication. Mobile network operators, Internet service providers and cloud-based services make up a majority of the wireless communication sub-sector.
How to invest in the telecommunication services sector
There are two ways to invest in telecom stocks, each with its own set of benefits and drawbacks. Individual stocks within the sector offer the opportunity for targeted investing for those who want to support individual companies. ETFs track the entire sector and bring diversification to a limited portfolio.
Stocks tend to be more profitable but are also more volatile. ETFs, on the other hand, offer stability but are accompanied by fees that typically range from 0.03% to 2.5%.
Whether you want to purchase stocks or ETFs, you’ll first need a brokerage account. Here’s a quick look at the investment process:
- Select a platform. With plenty of online brokerages to choose from, compare platforms to find the broker best suited to your investment goals.
- Open an account. Applications for web-based brokerages can be completed entirely online.
- Fund your account. Transfer funds from an external account to begin trading.
- Pick your securities. Using your platform’s research tools, filter stocks and ETFs by sector to narrow down your options.
- Place an order. Once you’ve found a security you’d like to purchase, submit your order.
- Watch your investments. Monitor your investments by logging into your brokerage account.
What stocks are in the telecommunication services 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 telecommunication services sector?
Major funds that track the telecommunication services sector include:
- Communication Services Select Sector SPDR ETF (XLC)
- Fidelity MSCI Communication Services Index ETF (FCOM)
- First Trust Indxx NextG ETF (NXTG)
- iShares Global Telecom ETF (IXP)
- iShares U.S. Telecommunications ETF (IYZ)
- SPDR S&P Telecom ETF (XTL)
- Vanguard Communication Services ETF (VOX)
How is the telecommunications sector performing?
The graph below tracks the performance of the Communication Services Select Sector SPDR ETF (XLC). Tracking the performance of ETFs is one way to monitor the overall trend of stock sectors.
Why invest in the telecommunication services sector?
The global economy relies on telecom services now more than ever before. This pushes telecom services into staple territory — a service that can remain in high demand, regardless of global, political or socioeconomic change.
As the telecom industry continues to rapidly evolve, investors have the opportunity to get in on the ground floor with low-cap companies on an upward trajectory. Growth is an inherent part of this stock sector, and investors that select their securities wisely have the opportunity to turn a sizable profit.
What unique risks does the telecommunication services sector face?
Rapid technological change puts pressure on seasoned providers while promoting ferocious competition among startups. This sector is prone to volatility due to the fast-paced nature of the industry. There’s plenty of room for profit, but during a bear market, losses can be sizable.
How to evaluate telecommunication companies
Knowing how to assess telecommunications companies can help you understand which companies are succeeding and choose stocks more wisely. Metrics to evaluate include:
- Size. Companies in this sector need to be large enough to weather the costs of service and network expansion. Low-cap stocks may be less expensive, but smaller companies are more likely to fold in an economic downturn.
- Price-to-sales ratio. A company’s price-to-sales ratio compares its stock price to its revenues and can help investors gauge how much other investors are willing to pay per dollar of sales for a particular stock.
- Average revenue per user. Assess a company’s growth performance with its annual revenue per user: A calculation of a company’s total revenue divided by its number of active users. For telecom companies, this can help you assess mobile service providers and cable companies by tracking their revenue generated per user.
- Churn rate. The churn rate is the rate at which customers terminate their service or abandon their provider for a competitor. A high churn rate means the company is likely experiencing difficulty retaining its user base.
Compare stock trading platforms
Compare brokerage accounts to find the right fit. Once you open an account, you can begin investing in stocks and ETFs.
The telecom sector offers investors the opportunity to back companies that facilitate global communications. While rapid growth is an attractive perk, investors should be wary of losses during a down market. Review your brokerage account options across trading platforms for the account best suited to your investment needs.
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