Investing in telecommunication services stocks
Benefits & risks of investing in telephone, computer and Internet providers.
Telecom services are in demand and rapidly growing, but the sector is prone to volatility. Here’s what investors should know before pouring money into the telecommunication sector.
What are telecommunication services stocks?
Telecommunication services stocks belong to the telecommunications sector of the stock market. In total, there are 11 stock sectors as defined by the Global Industry Classification Standard. Each sector contains a distinct slice of the market.
The telecommunication sector is made up of companies that facilitate global communication — think telephones, mobile devices and the Internet. While the industry got its start in the 1830s with the invention of the telegraph, it’s since grown to encompass telephones, radio, computers and more.
What subcategories does it include?
The telecom sector can be broken down into three primary sub-sectors:
- Telecom equipment. Companies that produce the hardware used for telecommunications, including computers, telephones, radios, transmission lines and transceiver stations belong to this sub-sector.
- Telecom services. Major players in the telecom services sub-sector include telephone service providers and cable companies.
- Wireless communication. Mobile network operators, Internet service providers and cloud-based services make up a majority of the wireless communication sub-sector.
How to invest in the telecommunication services sector
There are two ways to invest in telecom stocks, each with its own set of benefits and drawbacks. Individual stocks within the sector offer the opportunity for targeted investing for those who want to support individual companies. ETFs track the entire sector and bring diversification to a limited portfolio.
Stocks tend to be more profitable but are also more volatile. ETFs, on the other hand, offer stability but are accompanied by fees that typically range from 0.03% to 2.5% (many ETFs come with fees under 1%.)
Whether you want to purchase stocks or ETFs, you’ll first need a brokerage account. Here’s a quick look at the investment process:
- Select a platform. With plenty of online brokerages to choose from, compare platforms to find the broker best suited to your investment goals.
- Open an account. Applications for web-based brokerages can be completed entirely online.
- Fund your account. Transfer funds from an external account to begin trading.
- Pick your securities. Using your platform’s research tools, filter stocks and ETFs by sector to narrow down your options.
- Place an order. Once you’ve found a security you’d like to purchase, submit your order.
- Watch your investments. Monitor your investments by logging into your brokerage account.
A beginner’s guide to exchange traded funds (ETFs)
What stocks are in the telecommunication services sector?
The list below shows some of the telecommunication services stocks Canadian investors can buy into on either Canadian or US exchanges. If you’re interested in a specific company, take some time to carefully research it — including its history and financials — before you buy in.
- BCE Inc. (formerly Bell Canada)(TSX: BCE)
- TELUS Corporation (TSX: T)
- Rogers Communications Inc. (TSX: RCI-B)
- Shaw Communications Inc. (TSX: SJR-B)(NYSE: SJR)
- Quebecor Inc. (TSX: QBR-B)(OTC Markets, Pink Sheets: QBCAF)
- TeraGo Inc. (TSX: TGO)
- Cogeco Communications Inc. (TSX: CCA)
- Cogeco Inc. (TSX: CGO)
- Verizon Communications Inc. (NYSE: VZ)
- Comcast Holdings Corp. (NYSE: CCZ)
- American Tower Corp (NYSE: AMT)
- Chunghwa Telecom Co., Ltd. (NYSE: CHT)
What ETFs track the telecommunication services sector?
You can invest in telecommunication services ETFs from Canada, but if you’re looking for more options, you can also explore ETFs that trade on stock exchanges in other countries like the NYSE in the US. There are several Canadian-based brokerages that offer access to international exchanges on which telecommunication services ETFs trade including Interactive Brokers and Questrade.
Funds that track the telecommunication services sector include:
- BMO Global Communications Index ETF (TSX: COMM)
- CI Munro Alternative Global Growth ETF Common Units (TSX: CMAG)
- CI WisdomTree Canada Quality Dividend Growth Index ETF (TSX: DGRC)
- Evolve E-Gaming Index ETF (TSX: HERO)
- First Trust AlphaDEX Emerging Market Dividend ETF CAD Hedged Advsior (TSX: FDE-A)
- Harvest Brand Leaders Plus Income ETF (TSX: HBF)
- iShares Global Telecom ETF (NYSEARCA: IXP)
- Communication Services Select Sector SPDR ETF (NYSEARCA: XLC)
- Fidelity MSCI Communication Services Index ETF (NYSEARCA: FCOM)
- iShares U.S. Telecommunications ETF (BATS: IYZ)
- SPDR S&P Telecom ETF (NYSEARCA: XTL)
- Vanguard Communication Services ETF (NYSEARCA: VOX)
How is the telecommunications sector performing?
The graph below tracks the performance of the Communication Services Select Sector SPDR ETF (XLC) in the US. Tracking the performance of ETFs is one way to monitor the overall trend of stock sectors.
Why invest in the telecommunication services sector?
The global economy relies on telecom services now more than ever before. This pushes telecom services into staple territory — a service that can remain in high demand, regardless of global, political or socioeconomic change.
As the telecom industry continues to rapidly evolve, investors have the opportunity to get in on the ground floor with low-cap companies on an upward trajectory. Growth is an inherent part of this stock sector, and investors that select their securities wisely have the opportunity to turn a sizable profit.
What unique risks does the telecommunication services sector face?
Rapid technological change puts pressure on seasoned providers while promoting ferocious competition among startups. This sector is prone to volatility due to the fast-paced nature of the industry. There’s plenty of room for profit, but during a bear market, losses can be sizable.
How to evaluate telecommunication companies
Knowing how to assess telecommunications companies can help you understand which companies are succeeding and choose stocks more wisely. Metrics to evaluate include:
- Size. Companies in this sector need to be large enough to weather the costs of service and network expansion. Low-cap stocks may be less expensive, but smaller companies are more likely to fold in an economic downturn.
- Price-to-sales ratio. A company’s price-to-sales ratio compares its stock price to its revenues and can help investors gauge how much other investors are willing to pay per dollar of sales for a particular stock.
- Average revenue per user. Assess a company’s growth performance with its annual revenue per user: A calculation of a company’s total revenue divided by its number of active users. For telecom companies, this can help you assess mobile service providers and cable companies by tracking their revenue generated per user.
- Churn rate. The churn rate is the rate at which customers terminate their service or abandon their provider for a competitor. A high churn rate means the company is likely experiencing difficulty retaining its user base.
Compare stock trading platforms
Compare brokerage accounts to find the right fit. Once you open an account, you can begin investing in stocks and ETFs.
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Bottom line
The telecom sector offers investors the opportunity to back companies that facilitate global communications. While rapid growth is an attractive perk, investors should be wary of losses during a down market. Review your brokerage account options across trading platforms for the account best suited to your investment needs.
Frequently asked questions
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.
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