What Is the Technology Sector?

The Technology Sector Explained in Less Than 5 Minutes

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The technology sector—also known as the information technology (IT) sector—is the area of the stock market focused on technological growth, development, and manufacturing. The technology sector is responsible for many of the tools that make our lives easier, like smartphones, computers, and even software for Zoom meetings.

The technology sector, with its new ideas and new tools, attracts many investors for its potential for significant gains. But, like with any sector, there are potential downsides to consider as well. We’ll walk you through the pros and cons of investing in technology companies, so you can better understand how they can play a role in your portfolio.

Definition and Examples of the Technology Sector

The technology sector—also known as the information technology (IT) sector—is the area of the stock market focused on companies with revenue driven by technological growth, development, and manufacturing. It attracts many investors for its potential for significant gains, but there are also risks to consider.

The technology sector is a highly concentrated sector. In fact, more than half of the sector’s value is held by just a few companies, including behemoths Apple (AAPL) and Microsoft (MSFT). This sector makes up 27.9% of the S&P 500, the largest share.

Other large companies in the technology sector include:

  • Google (GOOGL, GOOG)
  • Meta (FB), formerly Facebook
  • Tesla (TSLA)
  • Alibaba (BABA)
  • PayPal (PYPL)
  • Adobe (ADBE)

How the Technology Sector Works 

Companies in the technology sector focus on developing new technology related to electronic devices, both internet and cloud-based products, as well as physical products for consumers. 

There are many ways to categorize the sub-industries within the technology sector, but the main groups are:

  • Software and services: Includes companies that develop software for the Internet, for computer applications, for database management or home entertainment. It can also include data processing, technology consulting, and outsourced services
  • Hardware and equipment: Includes companies that manufacture or distribute computers, computer equipment, electronics, and communications equipment.
  • Semiconductors and semiconductor equipment: Includes companies focused on developing and manufacturing microchips used in smartphones, cars, and many other applications. 

Pros and Cons of Investing in the Services Sector

Pros
  • Potential for significant gains

  • 5G rollout is expected to promote growth


Cons
  • Highly concentrated industry

  • Can be more volatile than other sectors like utilities or real estate


Pros Explained

  • Strong overall performance: The information technology sector generally performs well. In recent years, it has outperformed the broader S&P 500 Index. 
  • 5G rollout is expected to promote growth: As 5G, the next generation mobile network, continues to expand, analysts expect this sector to benefit.

Cons Explained

  • Highly concentrated sector: The technology sector is dominated by fewer companies, so the performance of those companies can more easily influence how the overall sector performs.
  • Risk of losses: While the sector performs has the potential for gains, its stocks also have the potential for significant losses.

What It Means for Individual Investors

The technology sector saw strong performance in 2020, particularly as millions of Americans started working from home and needing new ways to access information and stay connected, as well as more at-home entertainment options. The result was a higher demand for gaming software, PCs, personal devices, and more.

Overall, the information technology sector has historically performed well compared to other sectors, though investing in technology companies can be risky. 

Before investing, thoroughly research a technology company and weigh your pros and cons, perhaps with the help of a financial advisor.

How To Invest in the Technology Sector

You can invest in the technology sector in several ways. First, you can invest directly in an individual technology company through its stocks. For example, you could buy shares of Apple or Google. 

For more diversity, you can invest in the broader technology sector with index funds or exchange-traded funds (ETFs) that focus specifically on technology companies. For example, the S&P information technology index fund tracks the IT companies in the S&P 500 Index, and the Vanguard Information Technology ETF (VGT) follows 358 technology companies.

To start investing, you’ll first need to set up a brokerage account.  Again, thoroughly research any sector or company and consider your personal financial situation and goals before investing your money. 

Key Takeaways

  • The technology sector is composed of companies involved in information technology research and development, computers, hardware, and software.
  • This sector is highly concentrated. More than half of the sector is dominated by a few companies, including Apple and Microsoft.
  • Investing in the technology sector can be risky since this industry relies on the testing and development of new technologies that could underperform.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.