Every type of investment comes with risk. However, what differentiates ordinary people from pro-investors is where and how they are investing. And, when it comes to SPACs, investments are not any different. Although SPACs provide quite a hefty return, they are not risk-free. Nevertheless, SPACs are a great form of investment for those willing to take that extra risk to get them a greater return in the future. Keeping that in mind, if you think you are one of them, here are some steps that you can follow when you invest in SPACs.
Don’t forget to do your homework.
SPACs provide a fun opportunity for investors planning to place bets on specific markets that are expecting explosive growth, like clean energy or electric vehicles. However, SPACs are also considered challenging for buy-and-hold, long-term investments. Having said that, when you plan to invest, you should ensure that you have adequate research. This includes the following:
You should be well aware of the reputation and the track record of the management team leading the SPAC. Their career history and their commitment towards translating their vision into profits.
Pick a sector wisely
You should invest in an industry that you believe in. This would help you to determine the growth and identify the correct time for disruption. From public sources, you can evaluate the industry in which the SPAC might invest.
Keep the time frame in mind.
SPACs have 24 months to turn into an initial business combination from an IPO. If the merger did not take place within that time frame, the company would have to be liquidated, and investors would get their money back. So, keep in mind that when you invest in SPACs, you have to wait for 24 months at least before seeing any return on their investment.
Remember, it is a speculative investment.
According to the SEC, blank check companies along with SPACs are speculative investments. That means there are significant chances that investors might lose their initial investment. Hence, you have to ensure that you are investing only that amount of money on SPACs that you can afford to bid farewell. The pros maintain a bankroll when they invest in SPACs.
Diversify Your Portfolio
One of the crucial components of investments is diversification. So when you decide to include SPAC shares into your portfolio, you have to be careful about investing in low-risk investments to mitigate any risk of sudden loss.
Spreading the bet is a wise decision. Rather than simply targeting a single SPAC, you should divide your investment on different SPACs of varied sizes. This would help you increase the return on the potential targets.
The history of SPACs is a combination of high risk and good returns. Hence, it is a bit challenging investment for most individuals. However, when you give enough attention to these pointers mentioned above, you would be able to invest in potentially successful SPAC IPOs and experience good returns.