What is a 'Semiconductor'

A semiconductor is a material product usually comprised of silicon, which conducts electricity more than an insulator, such as glass, but less than a pure conductor, such as copper or aluminum. Their conductivity and other properties can be altered with the introduction of impurities, called doping, to meet the specific needs of the electronic component in which it resides. Also known as semis, or chips, they can be found in thousands of products such as computers, smartphones, appliances, gaming hardware, and medical equipment.

BREAKING DOWN 'Semiconductor'

Semiconductor devices can display a range of useful properties such as showing variable resistance, passing current more easily in one direction than the other, and reacting to light and heat. Their actual function includes the amplification of signals, switching, and energy conversion. Therefore, they find widespread use in almost all industries and the companies that manufacture and test them are considered to be excellent indicators on the health of the overall economy.

Semiconductor makers often see "boom and bust" cycles based on the underlying demand for chip-based products. When times are good, profit margins can run very high for chipmakers; when demand falls through, however, chip prices can fall dramatically and have a major effect on many industries' supply chains.

Research and Development are Key

Success in the semiconductor industry depends on creating smaller, faster, and cheaper products. The benefit of being tiny is that more power can be placed on the same chip. The more transistors on a chip, the faster it can do its work. This creates fierce competition in the industry, and new technologies lower the cost of production per chip so that within a matter of months, the price of a new chip might fall 50%.

This gave rise to the observations called Moore's Law, which states that the number of transistors in a dense integrated circuit doubles approximately every two years. The observation is named after Gordon Moore, the co-founder of Fairchild Semiconductor and Intel, who wrote a paper describing it in 1965. After 1975 the doubling period is often quoted as 18 months because of Intel executive David House, who predicted that chip performance would double every 18 months.

As a result, there is constant pressure on chipmakers to come up with something better and even cheaper than what defined state-of-the-art only a few months before. Therefore, companies need to maintain large research and development budgets. The semiconductor market research association IC Insights reported that the largest 10 semiconductor companies spent an average of 13.0% of sales on R&D in 2017, ranging from 5.2% to 24.0% for individual companies.

Investing in the Semiconductors

Aside from investing in individual companies, there are several ways to monitor the investment performance of the sector. These include the benchmark PHLX Semiconductor Index, known as the SOX, as well as its derivative forms in exchange-traded funds. There are also indices that break the sector down to chip makers and chip equipment makers. The latter develops and sells machinery and other products used to design and test semiconductors.

In addition, certain markets overseas, such as Taiwan, South Korea, and to a lesser extent Japan, are highly dependent on semiconductors and therefore their indices also provide clues on the health of the global industry.

RELATED TERMS
  1. Philadelphia Semiconductor Index ...

    The Philadelphia Semiconductor Index (SOX) is a capitalization-weighted ...
  2. Morris Chang

    The founder, chairman and CEO of Taiwan Semiconductor Manufacturing ...
  3. Blue Chip

    A blue chip is a nationally recognized, well-established, and ...
  4. Blue Chip Indicator

    Blue chip indicators seek to track the performance of the most ...
  5. Green Chip Stocks

    Green chip stocks are shares of companies whose primary business ...
  6. Purple Chip Stock

    Purple Chip Stock is a term coined by portfolio manager John ...
Related Articles
  1. Trading

    Weakness in Chip Stocks Is Creating a Buying Opportunity

    Nearby support and strong underlying uptrends on the charts of key semiconductor stocks suggest that now could be the time to buy.
  2. Investing

    USD vs. SOXL: Comparing Leveraged Semiconductor ETFs

    Discover and compare two semiconductor exchange-traded funds. Learn about their purpose, strategy, characteristics and investor suitability.
  3. Investing

    The Semiconductor Sector is on the Verge of a Breakout (SMH, INTC)

    The semiconductor sector may be on the verge of a major breakout that provides market leadership in 2016.
  4. Investing

    In the Chips: 10 Experts Share Semiconductor Buys

    The PHLX Semiconductor Index (SOX) has risen over 32% year to date, more than double the gain of the S&P 500. Chasing a hot sector is risky. But for those comfortable with momentum plays, ten ...
  5. Investing

    Top 5 Semiconductor ETFs

    For those looking to invest in semiconductor stocks, we'll explore ETFs and leveraged ETFs that can magnify returns of this rapidly growing industry.
  6. Investing

    BBig Data, IoT To Drive Semiconductor Growth

    New age technologies like Big Data, IoT, AI and 5G will replace smartphones and computers as future drivers of the semiconductor industry, Tokyo Electron's CEO said in an interview
  7. Investing

    Samsung May Pass Intel as Top Chipmaker This Week

    Samsung offers up preliminary Q2 results Friday—it's likely to show it's now the No. 1 chipmaker.
  8. Investing

    Samsung Poised to Surpass Intel in Second Quarter

    For the first time ever, Samsung is set to win the title of world's largest semiconductor maker.
  9. Investing

    Oppenheimer Expects Chip Industry to Continue Skid

    Chipmaker shares slide with rising US-China trade tensions—Wall Street sees declines continuing.
  10. Investing

    Chip Stocks Surge on Strongest Growth in 7 Years

    The SIA says the industry has 'settled into a period of significant and steady growth in 2017.'
RELATED FAQS
  1. Who are Intel's (INTC) main competitors?

    Explore Intel's many competitors in its six operating segments. Explore different niche companies and companies that compete ... Read Answer >>
  2. What are direct costs of sales?

    Direct cost of sales, or cost of goods sold (COGS), measures the amount of cash a company spends to produce a good or a service ... Read Answer >>
  3. What are the benefits of R&D (research and development)?

    Learn about the many benefits of research and development (R&D) efforts for companies in competitive markets, including the ... Read Answer >>
  4. How much of a drug company's spending is allocated to research and development on ...

    Pharmaceutical companies spend, on average, about 17% of revenues on research and development (R&D), one of the biggest spenders ... Read Answer >>
Trading Center