This article was updated on April 3, 2015. 

Before investors consider jumping into an Internet of Things, or IoT, stock, it's important  to first understand exactly what IoT is, its real potential, and who's making some important moves in the space.

The IoT isn't a get-rich-quick, ride the tech wave to the top, scheme. It's another investing angle investors should consider, among a myriad of other approaches. Also, with the IoT mostly in its infancy, near-term market gyrations are commonplace and the key for investors is to keep the long-term picture in mind as industry players carve out their IoT presence.

All right, the soapbox speech is over. Let's dive in.

Understand the opportunity
At its basic level, the IoT is the connection of formerly unconnected 'things' that now (or soon will) connect to the Internet, gather data, and communicate with other devices and things around it.

Ge
The IoT brings huge benefits for industrial companies. Source: GE.

For example, cars will soon communicate with each other about where they are, where they're going and whether or not it's safe for you to enter an intersection. No kidding. The US National Highway Traffic Safety Administration is looking into it right now. IoT also allows companies to analyze data from industrial equipment so that it breaks down less, spends more time running, and costs less to repair.

IoT has the potential to make our lives safer, save companies and the public sector billions of dollars, and provide tech companies hefty revenues at the same time.

Gartner estimates there will be 26 billion connected IoT devices by 2020, generating $1.9 trillion in sales . IDC says the IoT will be worth an astounding $7.1 trillion by that time. And Cisco Systems (NASDAQ:CSCO) takes it a step further by saying the IoT will become a $19 trillion opportunity over the next decade.

Those are all impressive numbers. And even if investors take the most conservative estimate among them, there's clearly a lot of potential from IoT technologies.

Intel

Source: IntelFreePress.

Know what you're looking for
Just like any subsection of a sector, the IoT isn't just one type of investment. There are sensor companies, chip companies, software and services companies, analytics companies, and even worldwide conglomerates that are doing great things with the IoT.

To help you figure out who's doing what in the space, here's a look at a handful of companies that are all making waves in IoT:

  • General Electric (NYSE:GE): GE already uses 10 million sensors in the equipment it sells, allowing its customers to analyze and track industrial products like never before. On top of that, the company built its own IoT software (called Predix) for managing all of that data. The company earned $1 billion in IoT revenue in last year and expects $4 billion to $5 billion by 2017 .
     
  • Cisco: The company talks frequently about the IoT, and uses its embedded wireless routers, switches and data management to monitor and analyze manufacturing, mining, utility and other industrial equipment. The company doesn't break out any of its IoT revenue right now, but Cisco's experience with Internet hardware and connections puts it in a great position to benefit from the IoT. (Here's a comparison between GE and Cisco as to which is the better IoT stock.)
     
  • Qualcomm (NASDAQ:QCOM): Back in 2013 the company set up the AllSeen Alliance -- a group of more than 50 companies -- which uses Qualcomm's open IoT device standards (called AllJoyn). Qualcomm's trying to make its AllJoyn the standard for IoT communication, and expects to make money in the space by transitioning some of its mobile chips for new IoT purposes. At the 2015 Consumer Electronics Show, the company showed off some of its connected-car technologies, and is working on vehicle-to-vehicle (V2V) and vehicle-to-infrastructure (V2I) communication systems. With Qualcomm already dominating the mobile chips industry, the IoT seems like the next logical step. 

    Qualcomm Ioe Landscape Eco

    Source: Qualcomm.

     
  • Intel (NASDAQ:INTC): Similar to Qualcomm, Intel's put together its own IoT standards with other companies, called the Open Internet Consortium. Intel also introduced its small Quark processor in 2013 that could power future IoT devices and the company is working with the city of San Jose to use its technology to monitor public utilities and transportation. The company made $2.1 billion in IoT revenue in 2014, up 19% year-over-year, and the company's making the Internet of Things its new focus. Earlier this year it purchased German chipmaker and home networking company, Lantiq, to further its connected home plans. (For some thoughts on whether Intel or Qualcomm is the better IoT stock pick, read this.)
     
  • CalAmp (NASDAQ:CAMP): CalAmp's wireless datacom business helps companies manage machine-to-machine (M2M) connections, and connects some of Caterpillar's largest equipment to the Internet. CalAmp's tech allows them to track, manage and collect data to help reduce equipment repairs and downtime. Insurance companies also use CalAmp's tech to collect driver information so they can decide what premiums to charge (called User Based Insurance), which is a promising subsection of IoT. CalAmp's one of the most expensive Internet of Things stocks, but that doesn't mean it isn't worth buying.
     
  • Sierra Wireless (NASDAQ: SWIR): Sierra Wireless makes wireless embedded modules for M2M devices, wireless gateways and software to manage IoT connections. The company holds roughly 34 % of the worldwide M2M embedded wireless modules market. Tesla and Ford use Sierra Wireless modules in their vehicles and Prague and London use them for smart lighting features around the cities. Most of the company's revenue comes from those wireless modules, so Sierra Wireless is making a pretty big bet on IoT. (For a comparison between CalAmp and Sierra Wireless, go here.)
     
  • Invensense (NYSE:INVN): The company makesmicro-electro mechanical systems (MEMS) for motion-tracking gyroscopes in mobile devices. If you've ever played a game on an Apple or Samsung smartphone, you've likely interacted with Invensense's tech. The company wants to bring its sensor tech to more IoT devices, with the company's CEO, Behrooz Abdi recently saying, "Our goal is that our sensors will be in just about anything that moves ." Aside from MEMS, the company wants to make C02 sensors and chemical sensors for the IoT. While Invensense is a strong Internet of Things player, there are three IoT stocks growing faster right now.

Jump in
Companies are still at the beginning stages of IoT right now, so there's both a lot of upside for investors and some significant risks as well. Most importantly, companies are still trying to figure out how to properly secure the Internet of Things. But despite the unknowns, it's clear companies are moving forward in the space and investors can benefit. Once investors determine whether they want a pure IoT play (Sierra Wireless), or a stock that's betting big on IoT but likely won't tank if things don't go its way (Cisco), then it's time to jump in.

Just remember the same level-headed approach to investing applies to the IoT: find a great company that's in a position to benefit more than the competition, and then stick with them for the long-haul.

Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends CalAmp, Cisco Systems, Gartner, Intel, InvenSense, and Sierra Wireless. The Motley Fool owns shares of General Electric Company, InvenSense, and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.