Risks and rewards of investing in tech stocks

Today’s fast-changing technology offers huge opportunities in tech stocks. However, fast change also brings danger. Here are 4 risk factors you face when investing in tech stocks (below we look at 4 ways you can minimize these risks—and increase your profits).

1. Marketing is as hard as inventing: Even a great new product or computer program may fail to overcome retailer and customer skepticism.
2. A tech stock’s acquisitions can bring “time-bomb” risk: Companies sometimes grow quickly by buying other companies. But sellers may simply want out of a losing situation.
3. Major tech stocks also make mistakes: Junior tech stocks often trumpet their deals with major firms, such as Apple. Apple has vastly more knowledge and bargaining clout than any individual investor. But it still invests 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 advance. Be especially wary when junior technology stocks splurge on elaborate web sites and glossy investor brochures.

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4 ways to minimize your risk in tech stocks

1. 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.
2. Focus on up-and-coming technologies: For this, you need to know how technology is changing. For instance, rising use of wireless devices, like the iPhone and iPad tablet computer, is increasing demand for faster, more reliable wireless networks.
3. 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.
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.

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