How to Invest in Biotech Stocks
Learning how to invest in biotech stocks can be intimidating for retail investors. These companies have a lot riding on their pipeline of drugs, devices and therapies. Investors doing their due diligence need to investigate the marketability of these drugs to understand what they’re investing in. The science jargon and high debt associated with biotechs is enough to put any risk-averse investor off.
The good news is that there are a variety of different ways to invest in biotechs. If you’ve got a mind for science and want to pick your own securities, there’s a whole sector to choose from. If you’d rather someone else do the legwork, you might trust a biotech fund. Whatever your approach or level of risk, it’s worth learning about biotechs before you take the plunge. This is a unique group of companies. There’s unlimited potential in both directions, which makes it of paramount importance to invest with confidence and understand the sector.
Here’s a look at how to invest in biotech stocks, depending on how hands-on you want to be.
Investing Through Exchanges
Biotechs, like any stock, are accessible through an exchange. If you’ve got your eye on a single company that trades on the NYSE or Nasdaq, simply invest through that exchange. This is the more direct way to invest in biotechs, but it’s also one of the riskiest ways. You need to be sure of the company you’re investing in and be able to vet it accordingly.
In buying a stock directly, you assume the complete risk and reward. This makes it a hands-on investment. You’ll need to keep up with the company and its drug pipeline as well as announcements about partnerships and clinical trials. It takes a lot of work to monitor biotechs, but the payoff is tremendous when the company launches a marketable drug that’s patent-protected.
The good news is that exchange-traded biotech stocks are diverse. There are plenty of blue chip biotechs to sound out your portfolio. There are also highly volatile small cap companies to contend with. You control your risk; you control your reward.
If you’re really confident in your stock-picking ability, OTC biotech investments are always an option. These companies usually trade in the penny stock range ($5 or less), which makes them even more vulnerable to instability. To make matters worse, OTC biotechs see plenty of pump-and-dump activity. That said, the upside is tremendous. A biotech penny stock with a viable drug has nowhere to go but up!
Like exchange-traded biotechs, OTC stocks take even more work to maintain. It can also be more difficult to monitor these companies, since they get virtually no analyst coverage. An OTC biotech investment is a bet on yourself – your ability to evaluate, choose and monitor a stock. This often means going above and beyond the usual investigation. All this extra legwork will pay off if the company positions itself to break into small cap or even midcap status and eventually lists on an exchange.
Through a Biotech ETF
If you hate risk but love the upside biotechs offer, an ETF or other managed fund might be the best exposure to biotechs for you. The diversity of companies in the ETF is enough to safeguard the value of the fund. Yet, at the same time, movers and shakers will push the price higher. Consider it a basket of biotechs instead of a bet on any one single company.
With all types of biotech ETFs out there, you’ll have no trouble finding one that fits your investment niche. Some focus on gene editing and molecular treatments. Others focus on oncology. Some even track fundamentals to target growth biotechs, companies with Stage 3 trials or those that are already profitable. Choose the variables that fit your investing thesis and target a managed fund where someone else shoulders the responsibility of balancing risk and reward.
Do Your Research Before Investing
Regardless of how you choose to invest in biotechs, retail investors need to do their research. Understand the security you own. What does the company focus on? What does its drug pipeline look like? Is it profitable yet, and if so, from what drugs? What partnerships does it have? It’s not enough to invest in “an oncology drugmaker” or “a company focused on genetic therapy.” Investors who understand the tech will understand the value proposition and struggles these companies face.
You don’t need to be a scientist to understand biotech stocks. Like anything else, they’re rooted in supply and demand. Look for companies that have a focus you care about. Then investigate their proposed solutions. If you think they have a viable shot at developing an answer to the problem, they’re worth looking at even closer.
Big Upside for Biotech Stocks
Investors love biotech companies because all it takes is one successful drug to turn a small cap company into a large cap powerhouse. So many biotech mainstays got their start in the penny stock junk pile – investors are always looking for the next one. It doesn’t need to be a penny stock, either. Biotech innovations benefit companies of all sizes!
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Learning how to invest in biotech stocks means getting comfortable with the different modes of investment. If you’re science-minded and all-in on a particular mode of research, OTC and exchange investments might be for you. If you want to hedge against the inherent volatility of biotechs, an ETF or sector fund is where it’s at. No matter how you invest, make sure you do your research beforehand. A well-played investment in biotech companies could be the gem in your portfolio.
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