What are the risks of investing in healthcare stocks?
Investing in any kind of stock comes with risks, including the possibility that competitors will develop more successful products and services. Healthcare stocks face these risks, as well as others unique to the sector.
Healthcare is highly regulated. Drugmakers and medical device makers can fail to secure the necessary regulatory approvals to market new products. Regulatory changes can drastically alter a healthcare stock’s growth prospects. In the U.S., the Food and Drug Administration (FDA) oversees the regulation of drugs and medical devices. It’s smart to pay attention to any FDA action related to medical stocks you’re watching.
Many healthcare stocks also face significant litigation risk. For example, biopharmaceutical companies, medical device makers, and healthcare providers can be sued if patients believe their products or services harmed them.
In addition, drugmakers and medical device makers must convince payers, including health insurers, PBMs, and government agencies, to buy their products. If companies aren’t successful in obtaining reimbursement approvals, their growth prospects can be reduced.
Many healthcare companies are also highly dependent on Medicare reimbursement levels. Recent changes to Medicare allow the program to negotiate prices for some high-cost drugs with pharmaceutical companies. Some drugmakers' revenues and profits could be negatively affected since Medicare pays less for certain drugs.
Benefits of investing in healthcare stocks
The key benefits of investing in healthcare stocks include:
- Many healthcare stocks have strong long-term growth prospects driven by aging demographics.
- Healthcare stocks tend to perform well during economic downturns.
- These stocks provide diversification in one of the most important sectors.
- Many healthcare stocks offer attractive dividends.
How to invest in healthcare stocks
Follow these steps to invest in healthcare stocks:
- Open your brokerage app: Log in to your brokerage account where you handle your investments.
- Search for the stock: Enter the ticker or company name into the search bar to bring up the stock's trading page.
- Decide how many shares to buy: Consider your investment goals and how much of your portfolio you want to allocate to this stock.
- Select order type: Choose between a market order to buy at the current price or a limit order to specify the maximum price you're willing to pay.
- Submit your order: Confirm the details and submit your buy order.
- Review your purchase: Check your portfolio to ensure your order was filled as expected and adjust your investment strategy accordingly.
Market trends & outlook
Current trends affecting healthcare stocks include:
- Adoption of artificial intelligence (AI)
- Transition to more outpatient care (for example, ambulatory surgical centers)
- Mergers and acquisitions
- The impact of GLP-1 drugs
- Expiring Affordable Care Act subsidies
Despite some challenges, the future outlook for healthcare stocks is promising overall, with aging demographics in the U.S. and other countries.
The bottom line
Despite these risks, the long-term outlook for healthcare stocks appears very good. Aging demographic trends worldwide, combined with advances in technology, should open up tremendous opportunities for healthcare stocks -- and deliver healthy returns for patient investors.
