How to Invest in Small Tech Stocks

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To invest in small tech stocks, research each company carefully, monitor the management teams to determine the company's credibility, and invest in several businesses to increase the chances of making money off of one of them. Invest cautiously in small tech stocks, which are high-risk investments, with information from a portfolio manager in this free video on investing.

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Video Transcript

No guts, no glory, that should be the motto of anybody that invests in a one product company. Hi, I'm Roger Groh with Groh Asset Management. Technology is a little bit different from most other businesses in that many technology companies don't initially fund themselves through public sales of stock. In fact, many are funded by venture capitalists in the beginning and once they get one product up and going, then they take that company public. The problem is that moving from a one product company or a two product company to a three or four or ten product company is very difficult. So the likelihood that you're going to make money while investing in small cap tech stocks is low. You have to be very knowledgeable and very careful as an investor in there. How can you improve your chances? Well probably by buying a basket or you buy several of them instead of sticking all of your money into one. In addition, looking very carefully at the management team to see what they've done in the past and then comparing that to what they do today. Meaning do they really understand the products that they're making? And have they done a great job in the past of distributing similar products? If the answer is yes, you have a chance. If the answer is no, be careful. On the other hand, technology does represent rapid long term growth. If you hit the right product you can do very well. We all know the stories of Cisco or Hewlett Packard or Microsoft and others that have come up and grown. One other item that we also have seen as buyers of technology is that in some products there's a continual license fee meaning yes I go and I buy their software at the store or download it and I have the right to use that for say a year. If I elect to use it in year two, I have to buy it again and pay a licensing fee. That licensing fee in some cases represents a large portion of their revenue and a very stable component of their revenue. In my mind, I would rather sacrifice a little bit of the upside potential in a one product technology company and look for companies where a large component of their income was from licensing fees. The reason is that revenue is going to be there no matter what and that's a stable base for them to grow from. That will probably result in that company being able to continue to have increased cash for research and development for future products going forward. Remember, 80% of profits comes from product created in the last 5 years. So if you don't create, you die. I'm Roger Groh and that's a little bit about talking about tech stocks.

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