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The Software Stock Market Game

Updated on April 21, 2016

The Software Stock Market Game

I'm a big fan of playing the stock market game. Though I haven't had an extensive amount of experience, I enjoy investing in new software companies that I find are marketing an interesting product, or that I believe has a chance at becoming a profitable business. While looking over different stock sectors, I began to notice that the many different software sectors all had very little growth. According to the NASDAQ "Sectors by Industry" chart, the "Business Software Services" industry only had a weighted alpha of +0.91. This would seem to me to be a surprisingly low alpha. For those who do not know what a weighted alpha is, it is essentially the measured year-to-year growth of a company's stock. Now, obviously, as an investor, you would prefer to have your stocks to experience positive growth on a year-to-year basis. This means that the higher the alpha, the better that industry or company performed over the year.

Note: Sometimes, a company has a period of time where its stock value will dip in the market. This does not always call for one to sell his stocks, as it could be just a temporary dip, and the company could experience an increase in its value over the next few years. Don't forget that sometimes the stock game is a long-term deal. What is even more surprising is that every other software industry, such as the Computer Software industry, has a negative alpha. This is not something I would have expected when I first began to play the stock market game.

Back to the software stock industry. What is even more surprising than the low weighted alpha of the "Business Software Services" industry is that every other software industry, such as the Computer Software industry, has a negative alpha. This is not something I would have expected when I first began to play the stock market game. I would have expected the software industry to have a really high growth rate. However, the more I learn about the stock market, as well as the world of software, the more I understand why everything is the way it is. I'll dig a little deeper and explain. Though the software industry is filled with endless opportunity and innovation, it is very difficult for a small software company to break out. I think the biggest reason for this is that there are a select few software giants that "own the market." Companies such as Microsoft, Oracle, IBM, and SAP own a large part of the market. It is really hard to compete with large companies, such as the ones listed above, as they have a large amount of resources that they can pour into their product line. They also tend to have a majority of the experienced software leaders, as they can provide the highest salaries. It becomes really hard to compete with these types of businesses, so most small companies seem to stick with a single product line, and then build off of that. Though this may keep the company out of the red, it is no way to experience high growth.

Another trend that I see among smaller software companies is that they are very quick to be acquired by the larger companies. I see it all over the news - the small startup companies are constantly getting bought out by the larger companies. There's certainly no blaming these companies, as I said before, it is hard to compete against the large enterprises; however, it certainly appears that this would also account for some of the lack of growth within the software industry.

Now, though the software industry does not have a high growth rate YTY, it does not necessarily mean that it is not profitable at all. As I noted before, sometimes it takes years for a specific company to have a sharp increase in stock value. Also, if a company that you have invested in is acquired while you still have its stock, it is very likely that you will see some profit. So, I still see value in investing in the software stock market, as certain companies still have a lot of potential, and it is a very interesting and exciting industry to be a part of.

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