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Investing in biotech stocks

An investment in biotech stocks is typically a waiting game — and a gamble.

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The groundbreaking research being done in this industry has the potential to change the world. But strict government regulations may put a damper on company profits and impact investor returns.

What is biotech?

Biotechnology is the research and application of biomolecular processes. These processes are used to create products and technologies designed to help improve our quality of life and support the planet. How? By helping us combat disease, improve the environment, harness clean energy, enhance food production and devise more efficient manufacturing processes.

Each time you take an antibiotic, drink a glass of wine or admire the newest designer dog breed on social media, you’re encountering biotechnology at work.

Biotechnology stocks are stocks from companies that research and produce biotech products, like pharmaceutical drugs, vaccines, biofuels, genetically modified plants, biocatalysts and more.

Why invest in biotech stocks?

Many biotech products — like pharmaceuticals — are a necessity. And staples like these have proven their capacity to weather down markets.

For example, in the first three months of 2020, the S&P 500 dropped by a sizable 26.7%, while the iShares Nasdaq Biotechnology Index ETF — a fund that tracks US biotech and pharmaceutical companies — only lost 15.6%. And in the past year, the same fund has outperformed the S&P 500’s 10.5% return with a 31.6% return of its own.

The COVID-19 pandemic caused many markets to tank. But stocks in companies looking for effective COVID-19 treatments and vaccines have received increased interest — at least for now. This is just one example of the down market resilience of the biotech industry.

Biotech stocks can help balance your portfolio during an economic downturn while providing the opportunity for investors to back groundbreaking technology — technology with the potential to alter and improve our way of life drastically. Biotechnology can and has changed the world — and investors can lend a hand in the process.

Risks of investing in biotech

The primary risk factor for biotech investors is the long, arduous and costly process of bringing a concept through research and development to a consumer-ready product.

Many companies in this industry rely on approval from the US Food and Drug Administration (FDA) and the process can take years. There’s no guarantee that a drug in development will reach pharmacy shelves or that a new industrial pesticide will be cleared for public use. Some biotech companies funnel funds into projects that span years with nothing to show for it.

The recent scramble for a COVID-19 cure demonstrates the potential instability of a biotech investment. As dozens of companies rush to develop a viable vaccine, stocks in this sector are seeing a volatility surge as investors queue to back the right racehorse. But only one can win — and once a vaccine is approved, the other companies fighting to be first may see a drop in share prices.

Investors must be willing to wait months or years for biotech stock investments to pan out. And even then, there’s no guarantee of return.

Biotech market projections

By 2025, the global biotech market is expected to reach $775 billion, according to Global Market Insights — an impressive figure considering the market was worth just $399 billion in 2017. Biopharmacy is by far the largest segment of the market, but bioinformatics, bioagriculture and bioservices are also on the rise.

Key market drivers include regenerative medical therapy, genetics in diagnostics and the advancement of artificial intelligence. Analysts forecast that the biotech industry is projected to attain a compound annual growth rate of 7.4% to 8.3% through 2025.

Biotech stocks

From startups with high hopes to well-established international corporations, there are numerous options for investors interested in purchasing biotech stocks. Select a company to learn more about what they do and how their stock performs, including market capitalization, the price-to-earnings (P/E) ratio, price/earnings-to-growth (PEG) ratio and dividend yield. While this list includes a selection of the most well-known and popular stocks, it doesn't include every stock available.

What ETFs track the biotech category?

For a less targeted and more diverse approach to biotech investing, consider any of the following exchange-traded funds.

  • ARK Genomic Revolution ETF (ARKG)
  • First Trust Amex Biotechnology Index (FBT)
  • Invesco Dynamic Biotechnology & Genome ETF (PBE)
  • iShares Nasdaq Biotechnology ETF (IBB)
  • SPDR S&P Biotech ETF (XBI)
  • VanEck Vectors Biotech ETF (BBH)

    How to buy biotech stocks

    Ready to invest in biotechnology? Here’s what to expect from the investment process.

    1. Research stocks

    There are plenty of pure-play biotech companies, some with US roots and others headquartered abroad. The right stock for your portfolio is a matter of cost, risk and strategy.

    Take a close look at the company’s repertoire of pharmaceuticals and technology. Is it a well-established business with numerous products on the market? Or is the company still waiting to clear its first product for public use?

    Do some research to identify which biotech stocks might be a practical fit for your portfolio.

    2. Open a brokerage account

    The next step in the investment process is to open a brokerage account. There are several online platforms to choose from, and each platform offers a unique blend of features and services for different types of traders.

    If you’re new to investing, consider a beginner-friendly platform like Robinhood or SoFi. If you’ve got some experience under your belt and plan on performing your own research, explore a platform with comprehensive research tools, like Interactive Brokers or TD Ameritrade.

    3. Purchase stocks

    Once you’ve opened and funded your brokerage account, you can begin the process of selecting and purchasing stocks.

    Search for your chosen stock by company name or ticker symbol. Once you’ve pinpointed the stock, enter the number of shares you’d like to purchase, select your order type and submit the order.

    You can monitor the performance of your stocks by logging into your brokerage account.

    Compare trading platforms

    To invest in biotech stocks, you need a brokerage account. Compare features and fees of top accounts to find the best fit for your goals and budget.

    Name Product Stock trade fee Asset types Option trade fee Annual fee
    Sofi Invest
    $0
    Stocks, ETFs, Cryptocurrency
    N/A
    0%
    A free way to invest in stocks, ETFs and crypto.
    Robinhood
    $0
    Stocks, Options, ETFs, Cryptocurrency
    $0
    0%
    Make unlimited commission-free trades in stocks, funds, and options with Robinhood Financial.
    Moomoo
    $0 for US stocks
    Stocks, Options, ETFs
    $0
    Trade stocks on the US, Hong Kong, Shanghai and Shenzhen markets.
    TD Ameritrade
    $0
    or $25 broker-assisted
    Stocks
    $0 + $0.65/contract,
    or $25 broker-assisted
    TD Ameritrade features $0 commission for online stock, but watch out for high short-term ETF and broker-assisted trading fees.
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    Compare up to 4 providers

    Disclaimer: The value of any investment can go up or down depending on news, trends and market conditions. We are not investment advisers, so do your own due diligence to understand the risks before you invest.

    Bottom line

    Biotechnology is rife with potential but is often subject to strict regulations. Investor funds may be tied up for years, and there’s no guarantee of a return.

    To invest in biotech stocks, explore your brokerage account options across multiple platforms for the account best suited for your investment goals.

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