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 are biotech stocks?
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.
Biotechnology stocks are stocks from companies that research and produce biotech products, like pharmaceutical drugs, vaccines, biofuels, genetically modified plants, biocatalysts and more.
How to buy biotech stocks
Here’s what to expect from the investment process.
Choose a stock trading platform. There are many platforms to choose from depending on your needs. 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.
Open your account. Apply for the type of account you want, whether it’s individual, joint or a retirement account. Note, you’ll need to provide your personal and financial information.
Fund your account. Once your account is open, transfer money. Typically, you can make a wire transfer or an ACH transfer.
Search for stocks. Look up stocks by ticker symbol or use a stock screener to filter the ones you’re interested in. The right biotech stock for your portfolio is a matter of cost, risk and strategy.
Place an order. Once you’ve found an investment you want, specify the number of stocks you want to buy. Some brokers let you buy fractional shares, which can be handy if you have a small account and the stock price is too high. Finally, submit the order.
Top Biotech Stocks
Finder’s investments experts analyze all S&P 500-listed stocks to curate a list of the best performing stocks. The companies are ranked in average order of both their year-to-date and month-over-month performance.
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 received increased interest. 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.
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
Key market drivers include regenerative medical therapy, genetics in diagnostics and the advancement of artificial intelligence. Analysts forecast that the biotech industry to be worth between $5.71 trillion and $9.06 trillion by mid-2030s.
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.
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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
Biotech companies use living systems such as cells, genes and proteins to develop treatments and other products and many are smaller businesses still working toward their first approved product. Traditional pharmaceutical companies tend to be larger, lean more on chemistry to produce drugs at scale and usually have products already on the market. The line between the two has blurred, and some companies are considered both.
A large part of a biotech's value can rest on a single drug or trial. A positive or negative clinical-trial result or regulatory decision can send the share price sharply up or down in a single day. Many smaller biotechs also have no products on sale yet and burn through cash while they research, which makes them more speculative than most other stocks.
A clinical-stage company is still testing its treatments in trials and usually has no approved products or sales revenue, so it relies on outside funding to keep operating. A commercial-stage company has at least one approved product generating revenue. Clinical-stage stocks tend to be higher-risk, since their future depends on results that haven't arrived yet.
Before a treatment can be sold in the US, it generally has to pass clinical trials and win approval from the Food and Drug Administration (FDA) — a process that can take years. Trial readouts and approval decisions are major catalysts for these stocks: an approval can push shares sharply higher, while a rejection or trial setback can trigger steep falls.
Most don't, especially smaller companies, because they reinvest their cash into research and development. Some large, established and profitable biotech companies such as Amgen and Gilead Sciences, do pay dividends. Because dividend policies can change as a company's finances shift, check the latest information before investing.
Individual biotech stocks offer higher potential reward but concentrate your risk in one company's pipeline. A biotech ETF spreads your money across many companies, which can soften the blow if any single one fails a trial. For that reason, ETFs are often a lower-risk way to get exposure to the sector, particularly for beginners.
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Finder is not an advisor or brokerage service. Information on this page is for educational purposes only and not a recommendation to invest with any one company, trade specific stocks or fund specific investments. All editorial opinions are our own.
Shannon Terrell is a lead writer and spokesperson at NerdWallet and a former editor at Finder, specializing in personal finance. Her writing and analysis on investing and banking has been featured in Bloomberg, Global News, Yahoo Finance, GoBankingRates and Black Enterprise. She holds a bachelor’s degree in communications and English literature from the University of Toronto Mississauga.
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