Investing in Internet Stocks

In the late 1990s and early 2000s, investment in Internet stocks was fed by a frenzy

Why Invest in Internet Stocks?

In the late 1990s and early 2000s, investment in Internet stocks was fed by a frenzy of speculation which pushed prices to extraordinary levels. In the wake of the dot-com bubble burst, investors in Internet stocks became more guarded and calculated, yet were still eager to capitalize on this growing sector.

The wild speculation during the early years of the Internet phenomenon has evolved into more responsible investing and has eradicated the nonperforming entities. Today, Internet stocks in general are thriving and are usually considered a good investment, although they do carry some risk.

How Is Investing in Internet Stocks Different from Traditional Stocks?

Typical investment strategies may not work when picking an Internet Web site to invest in. It’s difficult to predict whether a new Web site will become successful. Sites with established business leaders or investors can crumble, while sites run by amateurs with little business acumen can take off to become incredibly successful.

Internet stock also involves more speculating than traditional investing. Investors in traditional stocks choose investments based on years of company history and long-term potential. However, the very nature of the emergence of the Internet over the past years means that investors in Internet stock are typically seeking quick profits gained over a short term.

Investment in Internet Stock Requires Research

Investors in Internet stock can use the Internet itself to quickly and inexpensively research investment opportunities. When choosing an Internet stock, do thorough research and follow the basic rules of investing. Look for:

Stock Performance History: Has the company's stock demonstrated consistent performance or is performance erratic?
Revenue stream: Does the company provide a service or product that is in demand and able to sustain dependable growth?
Return on Investment: Does the company make more money off a customer than it spends on advertising or other methods of obtaining that customer?
Strategic vision: Can the company innovate, adapt, and embrace new technologies? Does it set new trends or just follow the leader?
Sustainability: Can the company withstand competition without a brick-and-mortar establishment?
Global reach: Does the company have an adequate distribution system to fulfill orders globally?

How to Value an Internet Stock

Valuing an Internet stock is tricky because investors need to predict the overall value and potential performance of the Internet itself. When valuing a particular site, investors consider:

The dynamics of the site’s entrepreneur or founder (such as eBay’s Pierre Omidyar)
The audience saturation of the site (such as MySpace or Amazon)
Projected longevity of the site
The site’s ability to attract revenue through advertisements

Despite new Internet stocks emerging every week, the high demand for Internet stocks versus perceived low supply can affect value as well.

Investing in Internet Stocks Can Be Risky

As with any investment strategy, investing in Internet stock is risky. Internet stock is more precarious than historically dependable stocks, offering either a high rate of return or a steep fall. A site’s performance depends on its durability, whether it has an effective or a risky business model, or if it is involved in a merger or acquisition.

Investors should do research to assure that a site, in addition to being popular and possessing many subscribers, is earning revenue. For example, despite News Corp.’s $580 million purchase of the incredibly popular MySpace in 2005, by April 2008 News Corp.’s stock was down 9.6 percent.

Internet Stock Opportunities

Investors could consider Chinese Internet stocks, which have long-term prospects and high margins. American Internet sites, such as eBay and Yahoo, have had to partner with Chinese sites in order to enter the lucrative and growing Chinese market.

Financial advisors recommend web-based software companies, media, communications and wireless technology. Investors should also consider trends that do well during an economic slowdown. Moreover, the atmosphere of mergers and acquisitions between Internet companies, which indicates a strong and healthy market, is also an exciting time for investors.

List of Internet Indexes