Investing in information technology stocks

It’s a potentially lucrative market segment, but the competition is fierce.

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The information technology sector spans a myriad of industries, from software startups to billion-dollar hardware providers. Before you invest in information technology stocks in Australia, know what you’re investing in and familiarize yourself with the company’s key competitors.

What are information technology stocks?

Information technology (IT) stocks belong to the IT sector, defined by The Global Industry Classification Standards 11 stock market sectors — each named for a distinct slice of the market.

The information technology sector is characterized by companies responsible for the research and development of electronic goods and services. It houses some of the most recognizable names on the market, including Apple, Amazon, Google and Microsoft.

What subcategories does it include?

The technology sector is broken down into three major industry groups:

  • Software. Companies that fall within the software industry include service providers connected to IT, data processing, search engines, systems software, home entertainment software and the Internet. Big names in this industry include Google, eBay, Amazon, PayPal and Microsoft.
  • Hardware. Providers in the hardware industry include companies that manufacture communications equipment, PCs, cell phones, electronic equipment, transformers and point-of-sale hardware. Some of the biggest players in this industry are Apple, HP, SanDisk and Motorola.
  • Semiconductors. A semiconductor is a piece of material — typically silicon — that conducts electricity across electronic circuits. Companies that manufacture semiconductors fall within this industry, including Intel, Microchip Technology and Texas Instruments.

How to invest in the information technology sector

There are two ways to invest in a stock sector: individual stocks and sector-tracking ETFs.

If you’d prefer to invest in individual companies and not the sector as a whole, stocks are your best bet. They tend to be more volatile than ETFs but can offer high-yield returns. If you’re interested in following the entire sector, consider an ETF. ETFs are more stable than stocks and offer more exposure, but come with expense ratios that typically range from 0.03% to 2.5%.

To purchase stocks or ETFs in Australia, you’ll need a brokerage account. Here’s what to expect of the investment process:

  1. Compare platforms. With so many online brokerages to choose from in Australia, explore your platform options to find the broker best suited to your needs.
  2. Open an account. Applications for web-based brokerages in Australia can be completed online.
  3. Fund your account. Before you can begin trading, fund your account with a transfer from an external account.
  4. Pick your securities. Use a screening tool to filter your options by sector.
  5. Place an order. Once you’ve found a security you’d like to purchase, submit your order.
  6. Track your investments. Log into your brokerage account to track the progress of your investments.

What stocks are in the information technology sector?

What ETFs track the information technology sector?

Popular ETFs that track the information technology sector include:

  • BetaShares S&P/ASX Australian Technology ETF (ATEC)
  • BetaShares Asia Technology Tigers ETF (ASIA)
  • ETFS Morningstar Global Technology ETF (TECH)
  • BetaShares NASDAQ 100 ETF (NDQ)
  • BetaShares Global Cybersecurity ETF (Hack)

How is the information technology sector performing?

The graph below tracks how the Technology Select Sector BetaShares S&P/ASX Australian Technology ETF (ATEC) has performed over the last five years. Tracking ETF performance can offer insight into how a stock sector as a whole is performing.

Why invest in the information technology sector?

There’s no way around it — information technology is an exciting space. Investing in the tech sector offers Australian investors the opportunity to buy shares in real-world tech they use every day. And the sector is so comprehensive that there’s plenty of room to diversify, whether you delve into hardware, software or semiconductors.

If you can afford it, you can opt for one of the tried-and-tested blue chips, like Facebook, Google, Microsoft or Amazon. The problem with these tech monoliths? Not all pay dividends.

Though some companies in the tech sector give back to their investors, some Australian investors get into the tech industry for a different reason: growth potential.

Technology is the largest segment of the market. With a solid grasp of the company you plan to invest in and its competitors, a nimble investor has the opportunity to make money in the tech sector by investing in small companies on an upward trajectory.

What unique risks does the information technology sector face?

The excitement that punctuates the technology sector gives way to fierce competition — a competition that fuels company acquisitions. Software tends to do well in a bull market, but during an economic downturn, companies can fold overnight. The opportunity for profit in the tech sector is accompanied by volatility — and this volatility has the potential to tank investments and cripple portfolios.

The tech sector is also vulnerable to government jurisdiction, as evidenced by the European Union’s General Data Protection Regulation. Facebook was pulled in front of Congress, demonstrating that tech giants aren’t immune to regulation. Australian investors need to keep their fingers on the pulse of the news to stay ahead of potentially damaging economic and political events.

How do mergers and acquisitions affect tech stocks?

Mergers and acquisitions can occur in any sector but are especially common in the tech industry. Mergers can trigger volatility within the sector, both for the companies affected and for competitors.

If you own stock in a company that’s acquired by another company, one of three things may happen to your shares:

  • All-cash deal. Your shares disappear from your account and you’re reimbursed with cash.
  • All-stock deal. Your shares disappear from your account in exchange for shares of the purchasing company.
  • Combination deal. Your shares disappear from your account and you receive a combination of cash and stock of the purchasing company.

When acquisitions occur, the companies announce the deal and shareholders can vote to approve the deal. Acquiring companies are typically willing to pay more than the asset’s current market price to encourage shareholders to approve the deal. Once approved, regulators clear the deal.

What does this look like in real life? Back in 2016, AT&T acquired Time Warner. Time Warner shareholders were offered a combination deal valued at $US107.50 per share. In exchange for their Time Warner stock, shareholders were given $US53.75 cash and $US53.75 in AT&T stock.

If you receive stock of the purchasing company during an acquisition, you’re not required to keep it. Shareholders can sell their shares at any time.

Compare stock trading platforms

These accounts let you invest in stocks and ETFs that track the technology sector.

Name Product Standard brokerage fee Inactivity fee Markets International
eToro Share Trading (US stocks)
US$0
US$10 per month if there’s been no login for 12 months
US shares, ETFs
Yes
Zero brokerage share trading on US stocks with trades as low as $50.
Join the world’s biggest social trading network when you trade stocks, commodities and currencies from the one account.
Superhero share trading
$5
No
ASX shares, ETFs
No
Pay zero brokerage on all Australian ETFs.
Trade ASX stocks with a flat $5 commission fee and a low minimum investment of just $100.
ThinkMarkets Share Trading
$8
No
ASX shares, ETFs
No
Limited offer: Get 5 free ASX trades when you open a new account with ThinkMarkets before June 30, 2021 (T&Cs apply).
Buy and sell CHESS sponsored ASX shares with $0 brokerage on your first 5 trades. Only $8 flat fee brokerage thereafter, plus enjoy free live stock price data on an easy to use mobile app.
Bell Direct Share Trading
$15
No
ASX shares, mFunds, ETFs
No
⭐ Finder Exclusive: Get 5 free stock trades and unlimited ETF trades until July 31, 2021 when you join Bell Direct.
Bell Direct offers a one-second placement guarantee on market-to-limit ASX orders or your trade is free, plus enjoy extensive free research reports from top financial experts.
IG Share Trading
Finder Award
IG Share Trading
$8
$50 per quarter if you make fewer than three trades in that period
ASX shares, Global shares
Yes
$0 brokerage for US and global shares plus get an active trader discount of $5 commission on Australian shares.
Enjoy some of the lowest brokerage fees on the market when trading Australian shares, international shares, plus get access to 24-hour customer support.
Saxo Capital Markets (Classic account)
$6.99
No
ASX shares, Global shares, Forex, CFDs, Margin trading, Options trading, ETFs
Yes
Acess 19,000+ stocks on 37 exchanges worldwide
Low fees for Australian and global share trading, no inactivity fees, low currency conversion fee and optimised for mobile.
CMC Markets Stockbroking
$11
No
ASX shares, Global shares, mFunds, ETFs
Yes
$0 brokerage on global shares including US, UK and Japan markets.
Trade up to 9,000 products, including shares, ETFs and managed funds, plus access up to 15 major global and Australian stock exchanges.
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Compare up to 4 providers

Important: Share trading can be financially risky and the value of your investment can go down as well as up. “Standard brokerage” fee is the cost to trade $1,000 or less of ASX-listed shares and ETFs without any qualifications or special eligibility. If ASX shares aren’t available, the fee shown is for US shares. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.

Bottom line

The information technology sector offers Australian investors the opportunity to back the hardware and software they use every day. It’s an exciting field but it’s prone to volatility — especially during a down market.

Explore trading platforms for the account best suited to your investment needs.

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