When you’re looking for investment plays that are risky, rewarding, and consistent, the healthcare sector is a staple. Unlike other markets which face volatile demand and ebbs and flows from competition, the world’s demand for healthcare is both consistent and growing.
That’s because healthcare and healthcare spending are needs. There’s always a drive for new innovations in healthcare and with the world soon to be dealing with an aging population, that drive will continue to ramp up.
So how do you invest in healthcare stocks, and what kind of investments should you make? For starters, consider that healthcare stocks will still face similar risk/reward patterns to their siblings in other sectors: large caps will be expensive and stable, and small caps will be volatile. If you know what to look for and when to make a move, the rewards can be astronomical.
Healthcare requires “active” investing
The important thing for investors to know about healthcare stocks is that these should be thought of as “active” investments. Though they make for great long-term investments in terms of profits and dividends, healthcare is one of the most results-driven industries around. Most of the money in healthcare is spent on research & development (R&D) and clinical trials, and investors need to keep up with the progress of their investments.
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“Healthcare” is a catchall term for many different types of companies that each offer their own benefits and drawbacks as investors. The most commonly referred to in the sector are pharmaceutical companies (pharma companies) and healthcare providers.
Different healthcare companies offer different rewards
Pharma companies are in the business of producing over-the-counter and prescription drugs and focus investments on developing new drugs and revenue streams. Healthcare services include hospitals, clinics, insurance providers, equipment rentals, and most companies that service clients directly.
A similar field of companies are medical device producers, which generally face a slower buildup of consistent demand and tend not to spike or dip much once approved. Likewise, a growing focus on technology has led to many software and hardware-focused healthcare companies that focus entirely on B2B efficiency and sales.
Potentially the most interesting from a small-cap perspective are biotechnology companies. These firms are usually involved in direct R&D for major ailments and the outcomes of their research, trials, and pending regulations are pivotal for the companies (and the many affected individuals involved).
Knowing the target market is critical
Investors in healthcare should get to know the market of their investments very well. For most, that includes the scope of the solutions provided and the scale of people affected by the associated ailments (whether as a number of people or the dollar size of the market).
Additionally, you should what threatens the success of your investment’s offerings. Potential substitutes and competitors can quickly whittle away at a target market, while a company with a large established network of clinics and doctors for distribution becomes more attractive.
The crucial aspect at play for healthcare investments is the make-or-break nature of R&D developments. Successful clinical trials can launch your company into the stratosphere, while failures can reverse any hype or goodwill you’ve generated. Likewise, IP rights and FDA approvals are the be-all-end-all for many pharma and biotech companies.
If that seems like a lot to keep in mind, don’t worry. Healthcare stocks are generally very long-term focused, giving you plenty of time to complete your due diligence. And again, the rewards for investments in healthcare can be monumental. Investing in a company that’s about to become a major healthcare provider for millions of people with serious ailments means you’re improving the world and making money at the same time.
New to investing in Healthcare? Check out Stockhouse tips on some of our Top Healthcare Stocks.
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