How to Invest in Biotech

Biotech investing has the opportunity for long-term investment growth.

The biotech sector is considered to be one of the growth stock market sectors of the future. Biotech is not dependent on the economy, but on the company's abilities to develop new products that will generate sales and profits. The shares of individual biotech stocks can be very volatile and using exchange traded funds--ETFs--to invest in the sector is a good way to invest in a diversified portfolio of biotech companies.

Instructions

1. Open and fund an account with an online, discount stockbroker if you do not already have one. Fidelity and E-Trade were the top rated brokers in the Smart Money magazine 2010 Broker Survey.

2. Review the current stock price charts of the top biotech ETFs. ETF share prices will follow the market trend for the specific sector. The two largest biotech ETFs are the iShares Nasdaq Biotechnology Index Fund, stock symbol IBB, and the SPDR S&P Biotech ETF, stock symbol XBI. These two funds take different approaches to the biotech sector, so owning some of each would provide a diversified biotech portfolio.

3. Calculate how many shares of each fund you want to buy. Look up the current share price on the brokerage account's quote screen and divide the share price into the amount you want to invest. Round the result to the nearest whole share.

4. Purchase your shares of the biotech ETFs by placing orders through the broker's stock trading screen. You will need to enter the stock symbol and number of shares to purchase. The final price for your purchases will be determined after the orders are filled and the shares are listed in your brokerage account. The purchase price will be at or very close to the ask price listed on the trade screen when you place the order.

Tips & Warnings

• The iShares Nasdaq Biotechnology Index Fund owns all of the biotech stocks listed on the Nasdaq stock exchange, approximately 120 stocks. This ETF is the most diversified biotech ETF.

• The SPDR S&P Biotech ETF owns about 30 biotech stocks picked on the basis of market capitalization and market volume.

• Use stock charts to pick an entry point for ETF purchases. If the shares are in a down trend, wait for a bottom and upturn before buying any shares.

• Biotech can be a very volatile market sector. For example, IBB lost over 40 percent of its share value and XBI lost 35 percent during the 2008-2009 stock bear market. Do your own research before committing to any stock market investment.

References

• ETFdb: Ultimate Guide to Biotech ETFs
• Business Week: Biotech ETFs: It Pays to Shop Around