Dec 15, 2021
What’s the Tech Sector?
Google, Facebook, and Amazon are just one part of a huge industry.
What is the tech sector?
In today’s world, it’s hard to imagine getting through the day without smartphones, computers, and even smartwatches or speakers that talk back to you. These products are all part of one of the most innovative sectors in the economy: Technology.
But the tech sector is much more than just a bunch of gadgets. It’s a vital part of the economy, employing more than 12 million people and producing almost $2 trillion worth of products, accounting for 10.5% of the U.S. GDP. Companies in this sector also produce parts such as semiconductors and microchips for new technologies, build electronic devices, develop software, and provide telecommunication and information technology (IT) services. Social media companies, which provide digital platforms for communication and commerce, are also a new and ever-evolving segment.
Many consider the tech sector to consist of two different sectors—information technology (IT) and communication services. The IT sector includes companies that provide networking infrastructure, make software, provide software services, produce hardware such as desktops and laptops, routers and other computer networking equipment. They also manufacture semiconductors and semiconductor parts, not to mention security systems that keep networks safe. Media and entertainment businesses, as well as telecommunication operations, are part of the communication services sector. In this guide, we’ll explore IT and communication services as components of one sector: technology.
The tech sector continues to grow. In fact, as of 2020, there are 585,000 tech businesses in the U.S., up from 525,000 in 2018, according to the Computing Technology Information Association. And new and innovative products and services are expected from tech companies as consumers become increasingly dependent on technology.
About three-quarters of Americans own either a desktop or laptop computer. Similarly, 85% of Americans own a smartphone, which was up from 35% in 2011, according to Pew Research Center. Meanwhile, 72% of Americans use some sort of social media outlet, compared to only 5% in 2005.
Companies in the tech sector frequently respond to consumers’ expectations. Cisco makes new internet routers with faster service and better security to power home and business networks. Apple introduced an iPhone with a choice of two or three cameras. Instagram is toying with the idea of removing likes and has innovated with its new dark mode. And as semiconductors find their way into more products, processes, and services, companies like NXP and Toshiba search for faster and more resilient materials to make their products.
Why invest in the tech sector?
Investors looking for innovation and growth may want to consider investing in the tech sector, which has a wide range of companies.
Companies in the tech sector vary in size and influence. You can invest in big technology companies such as Facebook (now known as Meta), Amazon, Apple, Netflix, and Google, known by the acronym FAANG. Other large companies involved more exclusively in the IT sector include Cisco, which manufactures routers, Hewlett-Packard, which makes laptops and cloud data centers , and IBM, primarily involved in the manufacture of software. Or if you’re interested in tech companies that are relatively new to the sector, you can invest in smaller start-ups that are working to disrupt their industries.
You can have your pick of companies that are building everything from computers, games, and websites, to networks, artificial intelligence, and apps that increasingly run the economy.
Volatility in the Tech Sector
The tech sector, with its constant innovation and evolution, is generally thought to be volatile, meaning there’s greater potential for risk, as stock prices can change frequently.
One reason is that tech stocks have historically been cyclical, meaning they move up and down based on the economy and consumer demand. But that may be changing, as business models for tech companies change to include subscription models and services, according to experts.
Companies in the tech sector may also face an overvaluation problem, or the possibility that their stocks trade far above their actual value. That can add to volatility, as the stocks may be likely to move up and down with greater speed.
U.S. tech companies are also facing more competition from countries such as China, South Korea, and Taiwan, among others. Competition can add to volatility.
Regulations and the tech sector
FAANG stocks including Facebook, Amazon, and Google are dealing with increasing scrutiny from lawmakers in Washington over issues about consumer privacy, security, as well as fears that they may be monopolizing entire industries.
Conservative politicians have also accused tech companies such as Facebook and Google of having a liberal bias, which the companies themselves contest. Former President Trump also sued social media companies for banning him for his role in inciting the January 6, 2021 riot on the U.S. Capitol.
Technology is also becoming more politicized as concern grows over political advertising on social media. Mark Zuckerberg, Facebook’s founder and chief executive officer, has testified on more than one occasion before Congress about the information Facebook collects about its customers. For example, he testified in 2016 about Facebook allowing the data firm Cambridge Analytica to access and use information of 50 million Facebook users to advertise to them politically.
Numerous politicians from both sides of the political spectrum as well as regulators, are grappling with the extent to which social media companies may be monopolies. Some have called for increased oversight, including breaking up some of the biggest tech companies such as Google, Amazon, and Facebook.
What companies can I invest in?
In 2021, more than 130 technology companies had initial public offerings, or IPOs, raising approximately $60 billion by offering their stock to the public for the first time. These include food delivery app DoorDash, home-sharing site Airbnb, intelligence software company Palantir, and more.
Investors in the U.S. can buy shares of these companies and any other public company in the tech sector individually, or through funds—such as exchange-traded funds, or ETFs—that invest in baskets of those companies.
Investing in the tech industry: single technology stocks
A single stock is just that, a share of ownership of a company. For example, investors can purchase shares of stock in companies like Alphabet, Apple, IBM, Netflix, and Microsoft.ª
Investing in tech ETFs (exchange-traded funds)
Exchange-traded funds (ETFs) are a basket of investments bundled into a fund that’s traded on an exchange like the Nasdaq or NYSE.
When you invest in an ETF, you are effectively buying small fractions of the companies within that ETF. The fraction depends on the weights of stocks held in that fund. That fund owns the stocks within it and generally tracks an index–or group of investments that represent part of an industry or investment theme.
Tech ETFs vs tech stocks
ETFs have become popular in recent years as they give investors the opportunity to invest in the performance of a group of stocks without having to buy every single stock in the fund or handpicking single stocks.
Not only can this save time and research, ETFs can offer diversification, which many consider being an essential investing strategy.