If you're considering investing in green technology hoping to make another kind of green--the folding kind--you'll need to deliberate carefully. Interest from governments, the public, and venture capital enhances the attractiveness of green companies. Also, daydreaming about finding the equivalent of Microsoft, getting in early, and retiring on the proceeds is a popular pastime. But while technologies that can help clean up and preserve the planet may have enormous potential, potential isn't necessarily the same thing as profit.

What is green technology?

Generally, the concept (also known as "clean technology" or "cleantech") includes renewable energy (or technologies that can improve the environmental footprint of existing energy sources), clean water, and clean air, as well as technologies that can help reduce overall consumption, particularly of nonbiodegradable substances. Such a broad scope can make it difficult to choose among the myriad investment opportunities.

Individual stocks or funds?

One of the key questions for many investors is whether to invest broadly in the future of green technology as a whole, or focus on specific companies. If you have special knowledge of an industry, you may be able to rely on your understanding of the field, but don't let that blind you to fundamental considerations about a particular stock.

If you don't have expertise about a particular field, the time or energy to acquire that expertise, or the stomach for what can be a very bumpy road with an uncertain destination, an alternative strategy is to invest in larger companies that have made a significant commitment to green initiatives. Though behemoths typically don't have the rapid growth potential of their smaller cousins, they often have the resources to acquire green technologies, or manufacture and market them globally more efficiently than a smaller company might.

Some exchange-traded funds and mutual funds focus on green technology or specific segments of it, such as wind or solar energy. If you believe in the future of an industry but hesitate to commit to one company, a fund that concentrates on your area of interest might be the ticket. Be sure to investigate its investment objective, risks, fees, and expenses, which can be found in the prospectus available from the fund, and carefully consider them before investing.

Researching green

If you choose to focus on individual stocks, here are some considerations that are especially important for developing technologies:

What's the competitive landscape? An idea that seems promising can quickly be superseded by the latest innovation. While it's difficult to forecast technical turning points, it's helpful to know the major players in the field, their key development efforts, and roughly how they're positioned. Don't forget that cleantech is a global playing field; many other countries are making significant green investments, hoping for homegrown worldwide dominance of the industries of the future.

How dependent is a company on external support? Last year's American Recovery and Reinvestment Act (aka "the stimulus bill") authorized billions of dollars for tax credits, loan guarantees, and pilot programs related to green technology. However, political support for such initiatives can come and go, as can investor enthusiasm for specific technologies.

How capital-intensive is the technology? Many green technology companies may have little or no profits yet but a substantial need for capital from a cash flow standpoint and/or as a result of the technology itself. That could make a company vulnerable to a potential credit crunch, which could have a significant impact on its ability to develop and market even the most promising technology.