Discover the best ways to add tech stocks to your portfolio

Tech stocks are companies that are involved in the research, development and production of technology such as electronics or software. With high research and development budgets, tech stocks rarely pay dividends and are often classified as growth stocks.

Investing in the best tech stocks for your portfolio

The best tech stocks have strong growth. The best technology companies can also become so successful that they start paying dividends. Investors should also scour a technology stock’s balance sheet to glean any hints of hidden value like research and development.

The success or failure of any tech stock depends on a variety of factors. The company may start out with a promising business plan. But it needs all sorts of things to prosper in the long run: the right employees, a favourable economic and regulatory climate, a favourable competitive environment, favourable research outcomes, adequate financing, perhaps the right merger partner or acquisition—the list is long.

What to know while selecting the best tech stocks

• High research and development budgets let tech stocks keep adding profitable new products to their lines and improving existing ones.
• High cash and low debt aids new product development.
• A strong reputation helps win new contracts.
• Often tech stocks will offer different classes of shares that come with various shareholder voting rights.(Investors can save money by purchasing the lower priced shares although they give up some rights).
• Is there a history of success?

Hidden value in research and development

Technology stocks have always been a more speculative segment of the stock market, but the technology stocks with the greatest long-term potential are those that continue to make significant investments in research and development.

The investment odds are against you in a “hot” market — one whose investment appeal is widely, if not universally, recognized. And most tech stocks, even in a market like we’re in now, are still overpriced. This is because many investors have inflated ideas of their value.

You can turn the odds in your favour by investing in tech stocks that have hidden assets, or assets that other investors overlook.

Hidden assets are items that don’t show up on a company’s balance sheet, but can offer dramatic rewards for investors who do their research.

Among technology stocks, research-and-development spending is today’s best-hidden asset. High research-and-development budgets let tech stocks keep adding profitable new products and improving existing ones.

Technology stocks have to treat this spending as a day-to-day expense, much like maintenance or taxes. So research spending comes out of the current year’s sales, and it lowers the current year’s earnings. As a result, earnings per share for tech stocks may appear lower than for stocks in other industries. But, when done right, research and development spending pays off in dramatic long-term returns, both for high-tech companies and for those who invest in technology stocks.

Four ways to increase your rewards with tech penny stocks

It may seem contradictory to use the terms “investment quality” and “penny stocks” in the same sentence. However, there are even wider disparities in the investment quality of penny stocks than in better-established companies. That’s because, while it’s hard for any new company to grow into a profitable business, it’s even harder in pioneering fields, where most penny stocks operate.

With tech penny stocks, there are methods and tips to gain greater returns from your investments:

1. Diversify: The high-tech sector has more than its share of winners and duds. So invest carefully and buy 5 to 10 tech penny stocks instead of just one. Gains on your winners can help offset any losses you may have.
2. Focus on up-and-coming technologies: To do this, you need to know how technology is changing. For instance, the immense popularity of wireless devices, like the iPhone and tablet computers, stepped up demand for faster, more reliable wireless networks.
3. Buy multi-product companies: Technological advances come in spurts, and they leapfrog each other. Focus on tech penny stocks that have some existing or soon-to-be-released products, and avoid one-hit wonders.
4. Look for earnings: A perpetual money loser will eventually go broke, no matter how impressive its technology. But if it makes even a little money, it can stay in business and perhaps reap the bonanza of a new product.

Four risk factors your face when you invest in tech penny stocks

Penny stocks have appeal for some aggressive investors who aim to get into fast-growing stocks at what they describe as “the ground floor.” They think the best way to profit in stocks is to buy them when they are just barely starting out on a growth phase that can last for years if not decades. Ideally, they want to buy the future top performers when they are still near or close to the penny stock range and have yet to be discovered by the broad mass of investors.

1. Marketing is as hard as inventing: Even a great new product or computer programs may fail to overcome the scepticism of retailers and consumers.
2. Acquisitions can bring “time-bomb” risk: Companies sometimes grow quickly by buying other companies. But it may also be the case that those selling the companies may simply want to bail out of a losing situation.
3. Major tech penny stocks also make mistakes: Tech penny stocks often trumpet their deals with major firms, such as Apple or IBM. And it’s true that Apple and IBM have much more knowledge and bargaining clout than any individual investor. But they still invest in products that fail.
4. High-tech shams are common: It’s easier to set up a company and sell stock to investors than to perfect a technological breakthrough. Be especially wary when tech penny stocks splurge on elaborate websites and glossy investor brochures.

5 aggressive investing tips to cut your risk

Here are four key ways to cut risk in your aggressive stock picks:

1. Limit aggressive investments to no more than, say, 30% of your portfolio.
2. Cut your risk all the more by taking a conservative approach to your aggressive investing.
3. Downplay stocks in the broker/media limelight—that limelight fosters bloated investor expectations.
4. Look for aggressive investing stocks with hidden value—value that attracts far less investor attention than it deserves.
5. Keep brand loyalty in mind.

Follow our three-part Successful Investor strategy

Limit your risk with stock investments by investing in most if not all of the five main economic sectors. Also, follow our three-part Successful Investor strategy:

• Invest mainly in well-established, dividend-paying companies;
• Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
• Downplay or avoid stocks in the broker/media limelight.

Are tech stocks part of your diversified portfolio? Share your experience with us in the comments.