Investor Toolkit: How to make higher profits — with less risk — in technology stocks

Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific advice on successful investing. Each Investor Toolkit update gives you a fundamental tip and shows you how you can put it into practice right away.

Today’s tip: “Some of today’s best investments are in high tech. So are some of the worst.”

Today’s fast-changing technology offers huge opportunities in technology stocks. However, fast change also brings danger.

Safety measures

• Diversify: The high-tech sector has more than its share of winners and duds. So invest carefully and buy 5 to 10 technology stocks instead of just one. Gains on your winners should overwhelm your losses.
• Focus on up-and-coming technologies: For this, you need to know how technology is changing. For instance, rising use of new wireless devices, like the iPhone and iPad tablet computer, is increasing demand for faster, more reliable wireless networks.
• Buy multi-product companies: Technological advances come in spurts, and leapfrog each other. Focus on technology stocks with a variety of existing or soon-to-be-released products, and avoid one-hit wonders.
• 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.

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Risk factors

• Marketing is as hard as inventing: Even a great new product or computer program may fail to overcome retailer and customer skepticism.
• Acquisitions can bring “time-bomb” risk: Companies sometimes grow quickly by buying other companies. But sellers may simply want out of a losing situation.
• Majors also make mistakes: Junior technology stocks often trumpet their deals with majors, such as Microsoft. Microsoft has vastly more knowledge and bargaining clout than any individual investor. But it still invests in products that fail.
• High-tech shams are common: It’s easier to set up a company and sell stock to investors than to perfect a technological advance. Be especially wary when junior technology stocks splurge on elaborate web sites and glossy investor brochures.

Investment opinion: Legitimate junior technology stocks are hard to find. That’s because they focus on perfecting and selling their products, rather than touting their stock.

Next Wednesday, September 1, 2010, Investor Toolkit will look at some factors to consider before you sell a stock.

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