Finder is committed to editorial independence. While we receive compensation when you click links to partners, they do not influence our content.
Investing in biotech stocks
An investment in biotech stocks is typically a waiting game — and a gamble.
Updated . What changed?
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.
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.
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.
Frequently asked questions
More guides on Finder
These IPOs will be hot in 2021
Private-equity companies have about $1.6 trillion of uninvested capital to put into merger and acquisition activity. This bodes well for 2021’s IPO market.
Robinhood may offer IPO shares directly to users — a move that confirms the changing game of IPOs
Traders on this popular beginner-friendly platform may be given the opportunity to invest in Robinhood shares at the initial offering price.
5 smart ways to invest your stimulus check
If you don’t need your money right now, consider investing in an HSA, blue chip stocks and more.
SPACs were hot in 2020, but can the heat last?
SPACs posted big gains in 2020, but can they repeat it in 2021?
Investing in pre-IPO stocks
What to consider before you back a pre-IPO placement.
401(k) contribution limits for 2021
Unlock the tax benefits of these retirement accounts and what to do if you maxed out.
Ustocktrade is an ambitious stock trading system offering cutting edge technology and unlimited day trades — but it has limits.
The top 5 stocks that beat Bitcoin in 2020
The top 5 stocks that beat Bitcoin in 2020 and why
3 ways to invest in private equity
Private equity could be a way to maximize returns. Learn more.
Bitcoin price update: The $1,000 drop
Many remain bullish despite Bitcoin dropping US$1,000 in less than 90 minutes.
Ask an Expert