In the early days of the pandemic, technology stocks were the talk of the town. Companies that provided quick, innovative solutions to a changing world’s problems were handsomely rewarded by the stock market.
In 2022, that enthusiasm has dampened, with worries of a looming recession hitting tech companies especially hard.
On Sept. 13, the Nasdaq-100 index — a benchmark of tech stocks — fell by more than 5.5% after the Bureau of Labor Statistics published higher-than-expected inflation figures. That news stoked fears of sharp interest rate increases and thus lower profits for debt-heavy tech companies.
Yet, many investors remain interested in tech stocks — and for good reason. Technology will play a major role in the future, helping to resolve questions about sustainable energy, automation, health care and housing.
Here’s an overview of what tech stocks are, a list of the best-performing tech stocks and your options for buying them.
What is a technology stock?
Technology stocks are publicly traded shares of companies specializing in the development and sale of technology products and services. You’re likely at least familiar with some of the major players in this sector: Apple (AAPL), Amazon (AMZN) and Google (GOOGL) are tech giants with market capitalizations in the trillions.
The tech sector is also one of the largest and most diverse sections of the stock market. Companies that fall under the tech umbrella span multiple industries and offer a huge range of services and products.
The Global Industry Classification Standard, or GICS, makes this easier to digest by grouping tech stocks into three main categories: software and services, hardware and equipment, and semiconductors. Companies can fall within one category or stretch across a few, depending on their offerings.
Semiconductors and semiconductor equipment
Companies that produce software or services for technology-based industries such as cybersecurity, data analysis, cloud computing and storage, artificial intelligence, workflow and project management, video streaming and conferencing, and social media.
Companies that manufacture or sell physical tech products such as laptops and computers, printers, hard drives, AI home assistants, GPS devices and smart watches, phones or appliances.
Companies that create and manufacture various chips, circuits and other physical components that power electronic devices such as phones, computers and cars.
Best-performing tech stocks
Below are the 25 best-performing stocks in the technology sector, in order of market capitalization and one-year returns.
Stock data is intended for informational purposes only, not for trading purposes.
The pros and cons of investing in tech stocks
Deciding to invest in tech stocks also means looking beyond the performance and earnings of one company. It’s important to understand the positives and negatives of how tech stocks function within the marketplace. Some considerations:
Pros of tech stocks
Diversification. The tech sector spans a broad array of industries as well as product/service categories, including cloud computing, e-commerce and social media services. This gives investors space to diversify their holdings across a swath of companies big and small.
Growth. With big risk sometimes comes big reward. This mantra is especially salient in the tech sector. Tech stocks are viewed by many investors as opportunities to invest in cutting-edge technology, which can be rewarding if a company’s product or service takes off.
Cons of tech stocks
Volatility. Data breaches, competition and economic trends, such as interest rate hikes, can affect a tech stock’s performance, which can impact a stock’s value. Compared with other sectors, tech also contains a higher concentration of less-established companies that might not have turned a profit yet, which can make it more difficult to assess the risks of investing.
Sky-high valuations. Tech stocks are known for being valued at very high prices. This might sound good, but when stocks are highly valued, their performance must keep up with the valuation to justify their price. When performance and earnings lag behind the initial valuation, the stock’s value can quickly plummet, leaving investors who bought in at a high feeling very … well, low.
Few offer dividends. If dividends are important to you as an investor, tech stocks might leave you wanting for more. Though a few major industry players, such as Apple (AAPL) and Intel (INTC) offer this perk, the majority of companies that make up this sector tend to reinvest their earnings rather than distribute payouts to their shareholders.
How to invest in tech stocks
How you choose to invest in tech stocks depends on your investment strategy and goals.
Investing in individual tech stocks
Choosing to drop serious cash on a single company is not an investment strategy that is well-suited for everyone. Doing so requires caution, research and the weighing of risks. If you want to go this route, you’ll also likely need to open a brokerage account if you don’t have one.
Basic due diligence should include understanding what the company does, what products or services it offers and how its business model addresses future needs. Reviewing the company’s financials, such as price-to-earnings ratios, profit margins and balance sheets, is also key.
Experts maintain that a good rule of thumb is to limit individual stocks to about 10% of your overall investment, so choose wisely. Finally, ensure that new investments you undertake jibe with your risk tolerance and your portfolio’s asset allocation. Find more information on investing by reading our primer on how to invest in stocks.
Investing in tech funds
If you’re not sure investing in a single company is right for you, consider exploring exchange-traded funds or mutual funds instead. These funds are composed of a broad range of stocks that will often provide some exposure to the tech sector. Purchasing a fund also allows you to diversify your holdings and can help you avoid the risks of funneling your hard-earned money into one specific stock.
Index funds, which follow existing indices such as the Nasdaq, are another option. Any returns or losses you make will mirror the index the fund is trailing.
And if you’re interested in technology stocks and want to go the fund route, you can consider tech-focused ETFs, mutual funds and index funds. For example, the Technology Select Sector SPDR Fund (XLK) is a large-cap ETF with over $40 billion in assets under management. Its holdings include Apple, Microsoft and Nvidia.
You can invest in funds via a brokerage or, if you prefer a hands-off approach, through a robo-advisor.
Neither the author nor editor held positions in the aforementioned investments at the time of publication.