The Advantages of Investing in Technology Stocks
While the perils of investing in technology stocks have been well documented, these stocks can also bring significant rewards to investors who choose the right companies and are fortunate enough to invest at the right time. Those who keep technology stocks in their portfolios are drawn by the potential for high returns, the opportunity for investors to select the companies they believe will prove successful and the historical returns provided by growth equities.
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Potential for Growth
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Many investors have been drawn to technology stocks by the prospects of a quick and significant profit. While technology stocks are not inherently more profitable than other stocks, they are frequently more volatile and thus may be more likely to substantially increase in value in a short period of time. Stock market investors who prefer riskier, more exciting stocks with a higher potential for return may be drawn to these companies over more staid alternatives, feeling that their own investing expertise will help them pick winners.
Diverse Options
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Technology stocks come in all shapes and sizes, and technology investors will typically be able to invest in a wide range of companies and business models throughout the sector. For example, an investor could choose to put money into a large software company, such as Microsoft or Cisco, while also investing in early-stage companies in the medical device sector. While a portfolio consisting solely of technology stocks is unlikely to be as diverse as many portfolio managers might recommend, investors will nonetheless have many different types of investments from which to choose.
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Tax Treatment
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Those investing in stocks can take advantage of tax rules that are in some cases more beneficial than the rules applied to other investments. For example, an investor who immediately sells his stock for a loss may be able to deduct that loss against ordinary income. However, an investor who chooses to hold onto a profitable stock investment for more than a year can delay paying taxes until the stock is sold and eventually pay only a significantly lower capital gains rate. For those investing in technology stocks, where volatility is higher, managing winners and losers properly can lead to significant tax advantages.
Pitfalls
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While technology stock investing can be profitable, those embarking on this course should be aware of the problems that can arise. The potential for technology company growth is accompanied by a potential for stagnation and even bankruptcy, as companies may invest in the wrong technologies and find themselves rendered obsolete by newer, more relevant firms. Technology investing is also more susceptible to overenthusiasm and bubbles, as investors become so excited about a prospect that they no longer apply traditional formulas for stock valuation. While this enthusiasm can in some cases be justified, it may also be unwarranted, in which case those investing at inflated prices could suffer substantial losses.
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