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Pros & Cons of Investing in Tech Stocks

January 21, 2020 · 7 minute read

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Pros & Cons of Investing in Tech Stocks

It’s almost become a trope at this point. Your friend’s aunt bought some Apple® stock way back when and lives full-time on a yacht now. Your cousin knows somebody who knows somebody who bought some Microsoft stock for a few dollars a share in the ’80s—and they’re a billionaire now.

These stories seem to fly around so much that they’re almost the stuff of urban legend. Someone made it big by buying a unicorn tech stock before it was lighting up the S&P 500 or the Dow Jones Industrial Average.

If you’re looking to buy a first tech stock or wanting to add some diversity to your portfolio, you may find the reality to be a little different from the stories. The returns may not be quite as dramatic.

And navigating an initial public offering (IPO) and trying to figure out if tech stocks work for your goals might be confusing, especially if you’re just starting to buy.

Tech stocks can come with a lot of the same potential benefits and risks as some of their blue chip predecessors that were more in the industrial or financial space.

These stocks seem to be known for their IPOs and stories about making billionaires out of college dropouts (and your friend’s aunt).

But, when it comes down to it, investing in a tech stock is a lot like investing in any other investment vehicle. It might help to know the landscape a bit, how the stock might or might not work for your goals, and why IPOs are such a big deal with tech stocks.

Why Are Tech Stock IPOs Such a Big Deal?

IPOs started out having a banner year in 2019. The second quarter of 2019 saw 62 IPOs that raised $25 billion , which was the most money raised in five years. But then the third quarter closed as the slowest in two years, with $3.5 billion raised by just 18 companies going public. Not all of those IPOs were tech stocks, but tech and biotech led the field when it came to Wall Street debuts.

So, have tech IPOs always been such a big deal? Kind of, but not really. When Microsoft went public March 13, 1986, the shares were initially offered at $21 each. The initial offering was expanded showing market demand, but there really wasn’t the same level of general public awareness or enthusiasm in Microsoft’s early days that some tech IPOs get these days.

For example, Snapchat got a minute-by-minute breakdown throughout its first day of trading from The Wall Street Journal. You could say it’s the 24-hour news cycle. You could say it’s the gold rush of tech stocks. You could say it’s a booming economy.

Whatever’s driving all the attention, tech stock IPOs get a bunch of it and that seems likely to continue. Thinking about jumping on that next tech IPO? It might be useful to verse yourself in how they work before taking the plunge.

How Do Tech Stock IPOs Work?

When a tech company is ready to go public, to sell shares of stock to investors, they typically start by filing a form with the Securities and Exchange Commission . This form is usually the S-1, and it usually comes along with a prospectus.

The prospectus can help potential investors decide whether or not investing in a particular IPO can work for their goals. They’re full of lots of valuable information, and reading a company’s prospectus first might be a good idea before deciding whether or not to invest.

Once the forms and prospectus have been filed, the SEC gives the documentation a good once-over to make sure everything is in order. Then the shares are offered to the public … sort of.

Most companies heading into an IPO will offer their shares to preferred investors, partners, and folks with lots of money at the IPO price. It can be tricky, and a fairly unique experience, for members of the general public to get in on an IPO right out of the gate.

That doesn’t mean you can’t get in on that hot new tech unicorn stock you just found out about, though. A more common way for investors to buy a tech IPO stock is when those initial shares have been resold on the public market, like Wall Street or NASDAQ, in the days following the initial offering.

Now that you have a basic grip on how an IPO works and how you can get some shares once you’ve done the research, let’s tackle the prospectus—why you might want to read them, what’s on them, and how they can help you make a decision that works for you.

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Reading a Tech Stock IPO Prospectus

Once an IPO has been registered and checked out by the SEC, a form 424B3 or 424B4 will usually be filed in the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) database. A quick search of the terms 424B3 or 424B4 in the database will show you the latest filings. You can also search by company name to find the prospectus you’re looking for.

The SEC has some guidance on how to move through the prospectus and find the information that could help you make informed decisions about your investment strategies. Here’s a rundown of what’s in one:

Prospectus Breakdown

•   Prospectus summary: This portion of the prospectus gives you a roadmap of what’s to follow.

•   Risk factors: Here the company will lay out risks that could affect the company’s performance (and potentially the stock price and your investment if you choose to buy stock in the company).

•   Use of proceeds: Companies usually offer an IPO to raise money for things like expansion and growth. Here you’ll find out how the company plans to use the funds they earn with the IPO.

•   Dividend policy: Lays out how the company will handle dividends.

•   Selected financial data: According to the SEC , “companies are generally required to disclose selected financial data for the prior five years.” If the company is pretty new, they can disclose up to two years of financial data.

•   Management’s discussion and analysis: This is where the company’s management can talk about their current state and any impactful changes they think investors should know about.

•   Business: Describes the company’s lines of business, its products, and its markets.

•   Management: Gives you some biographical info on the company’s executives and leaders.

•   Financial statements and notes: Provides standardized reports on the financial status of the company.

The prospectus can be a valuable research tool if you’re looking to invest in a tech company with a fresh IPO on the horizon.

Of course, post-IPO isn’t the only way to invest in a tech stock, even if they do seem to grab a lot of headlines when they happen. You can buy stock in plenty of tech companies that have been public for a while.

Cons of Owning Tech Stocks

Stocks can come with their own risks and potential downsides. Tech stocks are no different, and you might want to do a good amount of research to make sure they’re a good strategy for your financial goals.

There are some unique things to consider when it comes to tech stocks, which you might want to take into account before deciding to pull the trigger on one.

•   Tech-lash incoming? Some people think increased regulation and government scrutiny could lead to a backlash against tech stocks that could affect their future prospects. They cite 2018’s passage of the European Union’s General Data Protection Regulation Regulation (GDPR) and hearings that saw Facebook testifying before Congress as evidence that even more regulation might be coming in the future. But like many other sectors of the stock market, various tech stocks react in different ways in the face of volatility.

•   Buying what you know can be complicated. Warren Buffett says he only buys stock in a business he can understand. You might have a solid grasp on some of the social media giants, for example, but some emerging technologies might be a little harder to wrap your head around. You may have to ask yourself if you want to invest in a company that you might not fully understand.

•   Is it too late? Some tech companies, like Amazon and Google, have shares that are well into four figures, so it might feel like the ship has sailed for a first-time tech stock investor.

Research can be your friend when it comes to evaluating the potential pitfalls of a tech stock purchase. And while there’s a lot to navigate and take in, there could also be upsides when it comes to investing in a tech stock.

Pros of Adding Tech Stocks to Your Portfolio

Whether you’re up to your elbows in prospectuses or you’re just looking to diversify, there’s still much to be said for investing in tech stocks. Maybe you’re just getting your feet wet and buying something outside of an exchange-traded fund (ETF) or retirement account.

Some pundits agree that the big tech companies might be good bets. With artificial intelligence (AI) and machine learning (ML) on the horizon, there still might be a whole lot of world to change out there (and money to make—which could be good for you if your tech stock investment gets there first).

•   Tech’s blue chips. The term blue chip comes from poker, where blue chips had the highest value. In the old days, blue chip stocks were long-established companies with good returns. They were considered good investments. Today blue chips include huge tech companies like Facebook, Alphabet (Google), and Amazon.

•   Tech stocks can pay dividends. Some of them anyway. There can be benefits to dividend-paying stocks that might include consistent earnings, and they might indicate that the company is positioned to deliver strong performance.

•   You can actually buy shares in the stuff you use. Chances are, you probably use some tech in your daily routine. You might have a smartphone, a laptop, hop on a social network, or order some stuff online. With a tech stock, you can buy a little piece of the companies you know and like.

•   You can diversify in tech! Tech stocks aren’t a monolith. You can add some diversity to your portfolio just by purchasing different aspects of the tech sector. For example, you could buy stock in social media companies, smartphone glass manufacturers, hardware makers, software companies, and even green tech companies.

The pros and cons of tech stocks are probably going to be different for each investor. You might be a programmer who’s familiar with the latest blockchain technology and know that world in and out.

Maybe you’re someone who knows the killer content creators and sites that are coming up on the web. A great thing about the tech sector investing space is that there’s so much of it out there, and so many different investors can probably find something that works for their goals, ambition, and knowledge base.

IPO, Tech Stocks, Ready to Go?

Maybe you’re already digging into a hot new IPO prospectus or still weighing your options when it comes to a new tech stock purchase. There is probably a company out there that could work for your investing goals.

The tech sector is huge, and it’s getting bigger by the moment as ML, AI, and other technologies push the boundaries.

New founders are working on startups in garages and basements, pushing on that next new thing that could change the world (and maybe mint a new college-dropout billionaire!).

You could get in on the ground floor with SoFi Active Investing. Choose the stocks that suit you, and invest with no transaction fees and no account minimums. Another option is trying SoFi’s Stock Bits, which allows you to invest in major tech companies with as little as $1.

If you’re new to online investing and might not feel ready to take the plunge with a larger amount, fractional shares (SoFi Stock Bits) can be a great way to get your feet wet with fractional shares of companies—and diversify your portfolio at the same time.

Learn more about how SoFi Invest® can help you achieve your investment goals.


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