As with every article featured here, none of this is investing or financial advice. We encourage you to conduct your own research.
Here at Investing Strategy, we like to cover high-risk, high-reward shares in select sectors which provide the best opportunities in relatively short time frames.
One of these sectors is biotechs (or life sciences) with a focus on FTSE AIM stocks. There is a reason for this: US-listed biotechs command hefty valuations before they receive any news, with sharp rises rarer as potential good news is often already priced in.
By contrast, UK biotechs are generally fundamentally undervalued by the markets. As an example, Novacyt shares rose by 18,000% between October 2019 and October 2020 — and while the pandemic may have been a once-in-a-generation medical event, there remains many seriously undervalued biotechs on the London market, including the likes of human challenge trial leader hVIVO and chemotherapy trailblazer Avacta.
When it comes to biotechs in general, our thesis is that the world is ageing. One in two people will develop cancer in their lifetime – and heart disease, stroke, and diabetes will continue to rise in prevalence as western populations continue to eat too much chocolate without ever setting foot inside a gym, or indeed outside their own home.
Companies that can get in front of this trend will see serious value growth.
Biotech stocks: how to get started in 10 easy steps
Before you start investing, there are some basics to get to grips with here. Once you’ve read the primer (and remember, this is not advice):
1. Educate yourself – with any sector, there is a learning curve which includes plenty of technical jargon. Realistically, you are not going to be able to learn everything, but you need to be able to describe the different clinical trial phases and recognise where inflection points might be. For example, successful Phase 1B generally sees shares spike. If you can’t define oncology, orphan drugs, FDA, biomarkers, efficacy, endpoint et al, you can’t even conduct the necessary research.
2. Risk attitude assessment – consider your investing style. Traders can ride the ups and downs of clinical trials, while investors who think an opportunity is undervalued usually invest for several years. For context, the average new clinical trial has a 10% success rate and can take a decade to complete. Biotechs are usually only a part of wider portfolio, and few would invest in just one biotech.
3. Research companies – the AIM market has fallen by 33% over the past five years. High risk, high reward biotech shares are double-edged swords. For every Novacyt, there’s a dozen failures, and it pays to conduct thorough in-depth research. This includes websites, RNSs, investor presentations, the drug pipeline, the management team, competition, et al. For context, for every company covered on Investing Strategy, initial research has been conducted on roughly four other weaker companies that we haven’t published.
4. Diversify – as noted above, small cap biotech companies are high risk, so it makes sense to diversify across multiple companies, with exposure to different therapeutic areas and stages of development. You might also wish to diversify into lower risk areas such as insurance, and into other high risk companies such as those in the mining sector.
5. Financial analysis – study your potential investment’s financial statements, including the balance sheet, income statement, cash flow statement, potential revenue streams, research and development spending, and overall financial stability. If there’s debt or low liquidity, consider whether the assets on the books can make institutional financing possible, or whether tapping investors for more cash is more likely. In a high rate environment, funding is becoming harder to acquire.
6. Stay up to date – easier for professionals who can attend the usual conferences and forums, but Twitter (X) and LinkedIn exist. Many companies will be happy to reply to queries from investors over social media, and there’s plenty of excellent free news sources for biotech developments. It’s not all about the 7am RNS.
7. Understand regulation – in every market, there are different (though similar) regulatory pathways. For example, the UK has the MHRA, the US has the FDA, and the EU has the EMA. Regulatory changes can significantly affect the chances of a company’s success — while qualification to early-access drug approval on compassionate grounds can see shares soar (and patients survive otherwise untreatable conditions).
8. Adopt the mindset – while it’s easy to think you can trade for a quick 5-10% profit, the reality is that trading on leverage is neither tax-efficient nor easy. It requires massively more time and experience than long-term investing, and investing over the long term for the duration of a clinical trial is where the real profits are. Of course, there will be volatility along the way, and most trials fail. These companies are not dividend royalty, but then the rewards are far better than a basic 7% annual return.
9. Monitor investments – it’s important to check on your wider biotech portfolio and reposition where perhaps you have over/underinvested into one particular company. This is particularly important when you have mistakenly ‘fallen in love’ with a stock, and especially where there has been a material change in circumstances. Importantly, the company with the best PR and shiniest website does not necessarily have the best clinical trial candidates in development.
10. Pick an investing platform – Open a brokerage account that allows you to buy and sell biotech stocks. Ensure the brokerage platform provides the necessary research tools and resources for analysing mining companies – I’ve listed three popular choices below.
The most important statistic to consider with early stage biotechs is the failure rate. When 9 out of every ten trial candidates fail, you do need to have a high risk tolerance. Further to this, it’s worth considering less risky biotechs outside of the trials space, and also bulking up your portfolio with blue chips such as AstraZeneca.
4 best platforms to consider
1. IG Index
IG Index is perhaps the very best platform for UK investors looking for a platform offering access to small cap biotech shares. The UK’s largest CFD trading provider offers access to a whopping 18,000 global instruments, alongside some of the best technical tools on the market — including guaranteed stop losses and access to sophisticated trading technology.
If IG does not offer trading on the share, then it’s probably unavailable to the typical retail investor. Everything from the AQSE minnows to the FTSE 100 titans is available. And the app is exceptionally user-friendly — though it makes sense to make use of the demo account to test out all of the functionality.
Further to this, IG offers some of the best blue chip analysis and educational content available anywhere in the investing world — though in the interest of fairness, Investing Strategy’s lead analyst also works with the platform to create this content.
The platform charges £8 per trade per month for most equities, but this drops to just £3 per trade when you trade 3+ times per month. Given the importance of accurate pricing, this can end up being cheaper than using a ‘free’ platform. And importantly, ISAs and SIPPs are both available.
- Founded in 1974
- First-class web trading platform
- Superb educational tools
- Great deposit and withdrawal options
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 68% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
eToro is and remains one of the most favoured platforms in the UK, and with good reason. Its social media marketing strategy, tie up with X (formerly Twitter), and focus on copy trading have all helped it to become a preferred marketplace disruptor.
In particular, the copy trading aspect means that there is a strong social community to get additional perspectives on your favourite mining stocks from professionals you may not find elsewhere. And it’s all close to free. eToro boasts access to more than 3,000 instruments.
The app itself is well designed with a strong UX — features including push notifications, flexible search, and two-step authentication to keep your assets safe. And the platform is simply intuitive, making investing and trading both at home and on the move relatively simple.
Stock trading is completely free (with caveats covered here), and it’s very quick and simple to open your account. On the downside, there is limited educational material — which isn’t ideal for beginners, and non-core fees can mount up. For example, while trading is commission-free, there are fees for withdrawals, inactivity, and currency conversions.
However the $5 withdrawal fee covers any amount, so it discourages depositing and withdrawing small amounts, which can be good from a psychological perspective.
- 0% commission on US stocks
- Fast withdrawal
- FCA, ASIC, CySEC Regulated
- 2000+ assets
74% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
If you want to trade biotech stocks rather than invest (not our style, but up to you), then Plus500 is a popular choice. Plus500 has a decent CFD offering, allowing you to speculate on the price movements of shares without owning the underlying asset.
As I have covered in the past, most people lose money trading CFDs, there are no tax advantages, and it is often newer traders losing money to more experienced traders on the other side of the trade. On the other hand, trading on leverage can be seriously profitable for the lucky few.
Trading on Plus500 is commission-free, the app is easy to use even for beginners, and it has decent alerts and search functions. Trading tools on offer are fairly advanced, and it even has a smartwatch app if you feel like looking like a finance bro.
On the other hand, there are inactivity fees — and some investors find they need to upgrade once their knowledge base expands.
- Advanced risk management tools
- 24/7 online support.
- 30+ languages.
- All devices.
- 0 commissions.
81% of retail investor accounts lose money when trading CFDs with this provider.
AvaTrade is immensely popular globally for its forex trading offering, with 55 major currency pairs, a huge range of CFDs, and excellent educational content. But it’s good for stock trading too – it has a great selection of trading platforms, it’s easy to open your account, and the copy trading on AvaSocial is just as good as at eToro.
Avatrade could be the best platform for buying blue chip biotech stocks, such as AstraZeneca or Pfizer. While there are high inactivity fees, slightly higher costs than elsewhere, and a limited range of assets to trade, its worldwide presence makes it a popular choice for investors looking for a globally recognised brand.
- Fast order execution
- Tight spreads
- Zero commissions
- Big variety of deposit methods
- Risk-management for beginners “AvaProtect”
- Negative Balance Protection
76% of retail investor accounts lose money when trading CFDs with this provider.
Choosing an investment app for you
There are several important questions to consider when it comes to choosing an investment app – whether for mining stocks or otherwise:
Is there a Demo Account?
Practising on a demo account allows you to try out a platform, check it offers all your favourite shares, and see whether the UX design works for you. What works for one investor won’t work for another, and there are literally hundreds of differences between each.
Can you open an ISA/SIPP?
The tax advantages of ISAs and SIPPs are simply outrageous, and you can invest £60kpa into your SIPP from your gross income, and £20kpa into your ISA from your net income. If you prefer to invest rather than trade, this is a key decision factor.
How experienced are you?
Your investment experience will determine what platforms works best for you. If you plan to trade often, know all the basics, want all the latest tools, and are happy with your risk attitude, then you will need a different platform compared to an investor just starting out.
Do you understand the fees?
High fees can eat away at your gains, but even the so-called ‘free’ apps charge in one way or another. It’s important to consider the entire cost of opening an account, opening a position, closing it out, FX fees, withdrawal costs, overnight charges, and even inactivity fees. That’s just the start.
Do you need customer support?
In the days of instant apps, you might find you don’t think you need decent phone-based customer support – that is, until you do. A 24/7 hotline usually only comes with a premium platform, and you must usually be prepared to sacrifice some customer service if you go down the commission-free route.
How safe is my app of choice?
There are three key factors UK investors should look for: FCA authorisation, FSCS compensation scheme compatibility, and two-factor authentication. These three things are critical — and if not, a suitable alternative.
The bottom line
Investing and trading in early-stage biotech stocks is high-risk, high-reward activity. Learning how to invest takes time, and picking the right investing app or platform for you can be a case of trial and error. It can make sense to open Demo Accounts with multiple providers (starting with the three above), and then progressing into live accounts when you feel confident.
Similarly, it can make sense to invest in blue chip biotechs such as Pfizer, Roche, or AstraZeneca while engaging in small cap research. This can help you avoid losing money simply due to lack of research or market understanding – before you take the plunge with your first high-risk investment.