What's the difference between biotech and pharmaceutical stocks?

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.

Why are biotech stocks considered risky?

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.

What does 'clinical-stage' mean?

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.

How does FDA approval affect biotech stocks?

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.

Do biotech stocks pay dividends?

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.

Should I invest in individual biotech stocks or a biotech ETF?

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.