Is it a good idea to invest in technology stocks?
Technology stocks achieved huge profits during the years 2020 and 2021, which aroused the interest of many to invest in them, however, in light of the tightening monetary environment, technology stocks fell by more than 30% in 2022, and suddenly became one of the investments that everyone rejects, but with the beginning of 2023 it seems The optimistic days are back again, as stocks rose strongly, and the Nasdaq index recorded at the end of January the best monthly performance since July 2022 and recorded the best annual start since 2001.
Many investors prefer the shares trading of technology sector due to its high growth potential, and the technology industry is considered one of the leaders in the industry sectors in the global industry classification standards GICS and ICB, and it is also a very important sector in the stock market, and currently, it is the largest among the 11 major industries in the United States, it is also the most growing sector in recent years.
Investing in technology stocks has many advantages:
1. Huge growth potential: As companies improve productivity using technology, information technology will continue to be a major force for growth in the next few years, and innovative technologies may bring huge benefits.
2. Diverse Choices: The size of the technology industry with its diverse subcategories results in a wide variety of companies within the industry to choose from.
3. Obtaining good annual profits through the distribution of profits on shares.
Disadvantages of technology stocks investing:
1. High valuations: The technology sector usually has high valuations compared to other industries. In most cases, these valuations represent the future value of innovative technologies. Although high valuations are very beneficial to stock growth, they are also very dangerous. Once development is not As expected, companies may incur huge losses.
2. The effect of rising interest rates and inflation: Many technology companies do not have current earnings or dividends, and their high valuations come from future cash flow only. However, when the discount rate changes such as inflation and interest rates rise, the estimated value discounted by the valuation model will become Smaller, simply put, an increase in interest rates will render future cash flows worthless, causing stock prices to drop.
3. High volatility: The technology industry often generates high but short-term profits, which can easily cause high volatility in stock prices, so it will be relatively difficult for investors to decide when to buy and sell, in addition, because the high valuation of technology stocks Comes from the high potential growth, when the economy is not good or the growth momentum disappears, there is no support for the high valuation, and the stock price will fall quickly and sharply.
4. Technology stocks are not known for their high dividends: Most technology companies use their earnings for research and development or innovation and do not necessarily pay dividends, so if you are expecting dividends the technology industry may not be a good choice, (technology stocks in the US mostly do not pay dividends, but stocks Technology in many countries is different, and many large-cap technology stocks have good returns.)
5. Antitrust Lawsuits: As the tech giants' influence expands, so do disputes such as market monopoly and privacy violations. For example, large companies such as Google, Meta Corporation, and Amazon are facing antitrust lawsuits in the United States and Europe.