If you are interested in investing in SPAC stocks, looking to capture large capital gains you need to understand these three rules to not only protect yourself from making a bad investment but increase you odds of making money.
SPAC stocks “Special Purpose Acquisition Companies” might be tempting to just jump into with the recent success in Nikola and Virgin Galactic’s IPO, But you have to keep in mind these are considered some of the riskiest investments you can make in the stock market.
Understanding the risks firsts will allow us to have better judgment when following the three rules to making the right SPAC stock investment.
Top 3 Risks when investing in SPAC stocks
SPACs operate as holding companies that park share holder capital “your invested money” for a potential bid on company. This is a considerable risk as multiple companies will be bidding on the same acquisition target leading to investors paying top dollar for the assets.
SPAC stocks offer more security then regular stocks as they have typically 2-3 years to find an acquisition or the share holder capital “Your invested money” gets returned at fair market value. Considering the small size of the average SPAC stock being between 200 & 300 million dollars, this will cause a volatility risk in the SPACs stock price.
The largest risk by far with SPAC stocks is your ability to execute on an investment strategy. Meaning simply are you in this for a swing trade, buying for the IPO excitement? Or are you looking for a SPAC that has a target merger date with a company your truly believe in?
Understanding these risks will allow us to make better judgment calls on our investments and here’s why
A SPAC Stock That Will Be Profitable Has To Have Attention On The IPO
Now that we know SPACs pay premiums for purchasing acquisition targets we can understand that whether your investing for the long term or just an IPO flip, there needs to be enough attention around the company to make sure people will be interested in buying on the IPO to make up for the sellers.
It’s hard convincing investors to pay top dollar stock prices on the IPO for companies that don’t have an exciting future, so how do you avoid picking a flopped SPAC IPO. Simple pay attention to the media, you want SPACs that will get listed on forums like Stock Twits and with a simple YouTube search everyone should be talking about it.
This sounds simple enough but you have to understand, after the IPO the stock is priced at typically a premium to fair market value. This requires enough excitement in the stock IPO for investors to make a return in the short and long term.
How To Recognize A Good Time To Buy A SPAC Stock
Do to the fact SPAC stocks to trade at small market caps they tend to be exposed to more volatility, simply meaning traders may buy in and out of them causing larger price swing in the stock.
This can leave an investor buying at all time highs only to watch the stock price settle 50% lower leaving you board for months waiting for an acquisition. To avoid this we recommend a strategy that works very well for SPAC stock pre IPO.
This SPAC stock strategy is simply dollar cost averaging, If you believe in the company you should already be willing to see your investment drop. There is no way to control the day to day stock price especially ones with a lot of attention and small market caps. So your simply better off setting aside the amount you wish to invest in the company and divide it out over 3 months, only buying on days it dips insuring the best median price.
Understanding a SPACs Management Team
This is by far the most crucial part of investing in SPAC stocks, not only are you trusting these managers with your money but you also have to be aware of the company there acquiring and if its the investment for you. If your buying a SPAC stock with no announced target yet you need to make sure the management team is trust worthy.
There are many trust worthy management teams and even Goldman Sachs has its own SPAC stock called GSAH-UN. If your looking for long term investments and would rather understand the company that’s merging you will be in a different basket of SPAC stocks.
Looking for already announced SPACs is much more attractive because we can already judge the hype around the media and have a chance to understand the business model before the merger IPO. This is considerably lest risky and is the route we always suggest!