Investing in SPAC stocks can be a profitable decision as they are so popular these days. But it can be a very confusing process to understand which SPACs to invest in and which ones to avoid. In this article, we will look into how to invest in SPACs the best way.
What is SPAC?
A Special Purpose Acquisition Company (SPAC) is a shell company whose aim is to acquire a private company in the future. The purpose of establishing a SPAC company is to collect capital from the public and use it for a business combination. One of the reasons why SPACs are so popular these days is that they are risk-free. Investors can make their choice to redeem their investment if they do not like the target company. Also, for private companies, SPAC has become an alternate route for them to go public. Traditional IPOs are expensive and should have to wait long to get approval. But SPACs have made the process so easy and the success rate is also very high.
Benefits of SPACs
Before understanding how to invest in SPACs let’s understand some of the benefits provided by SPACs.
Investors who invest in SPACs have more security in their investment. That is, SPACs are meant to complete the business combination within the specified period (2 years). During that period, the money they collected will be stored in a trust account and some fraction is used for management. If the SPAC is unable to undergo a merger, all the investment will be given back to the investors.
Another main advantage is found during the de-spac transaction. Once the SPAC has announced the definitive agreement, there will be a shareholder approval process. During this process, all the shareholders can participate in proxy voting. The proxy statement will include the multiple issues on which shareholders should vote. They can show their satisfaction or dissatisfaction with those issues. If there are any shareholders that do not support the business combination can redeem their shares within the redemption period.
For Private Companies
Private companies see more benefits going public through SPAC than the traditional IPO. With SPAC the process is short and there is a higher possibility to collect more capital. The definitive agreement between the SPAC and the private company will include the demands of the private company as well. That is, they will showcase their deal value and also can include PIPE deals. Private Investment in Public Equity (PIPE) allows the company to get more capital through private investors.
How to invest in SPAC?
So, the SPACs are good stocks in the market that can be invested for a good return on investment. Now let’s talk about how we can invest in SPAC. There are multiple ways to invest in SPACs and some of them are listed below.
The best way to invest in SPAC is when it opens its Initial Public Offering (IPO). One of the benefits of investing in SPAC IPO is that they offer units at a strike price (generally $10). A unit is a combination of a share and a fraction of a SPAC warrant. A full warrant can be redeemed to a full share at a strike price (generally $11.50). The main benefit of having SPAC warrants is that they provide more coverage with a small amount of money. Also, you can trade them if you think they are not worth holding for long.
If you missed purchasing the stocks from SPAC IPO, you can just go to stock exchange platforms such as NYSE or NASDAQ. You can either buy the stocks of that SPAC company or its warrants. Most of the SPAC stocks trade individually making them more vulnerable to trade-in. What this means is that as retail investors we may not have good expertise in the SPAC investment. As a result, it is always a good option to invest in hedge funds or SPAC-focused ETFs that help to minimize the losses.
Hedge funds are financial companies that use their clients money to invest in different kinds of stocks. They trade in every kind of market situation i.e. inclining or declining, making them a good choice. Hedge funds have an expert team that can trade long or short based on their trading requirements. As a result, they are successful in most cases. The financial company will take a percentage cut from your profit as their reward. If you think that you are not expert enough to invest in SPAC on your own, you can choose SPAC-focused hedge funds. Also, these hedge funds sometimes have internal information about the stocks giving them advantages over retail investors. As a result, their investment is sometimes called Smart Money investment.
If you want less risk you can try SPAC ETFs. SPAC ETFs are not very popular but they certainly do exist. What makes them a safer option is that they are basically Exchange Traded Funds focused on SPACs. ETFs will have a wide range of stocks, and when you purchase one you will purchase the ETF unit. This unit will trade in the stock exchange with a combined average price of all types of stocks inside the ETF. So the price you see of the ETF unit is not the price of a SPAC stock but the combined price of different stocks from different industries. As a result, if the SPAC stock price goes down, it will have very little effect on the ETF unit.
Some of the most popular SPAC ETFs that you can check out are listed below:
- Defiance Next Gen SPAC Derived ETF (SPAK)
- CrossingBridge Pre-Merger SPAC ETF (SPC)
- SPAC and New Issue ETF (SPCX)
- Morgan Creek – Exos SPAC Originated ETF (SPXZ)
SPACs are a great way for private companies to go public. They give investors and private companies a lot of advantages as a result they are getting so popular. To be more successful in SPAC investing, you will need a proper SPAC analytics tool. A tool that can provide you authentic news about de-SPACs, mergers, tickers, etc. in real-time. A tool you can completely rely on to watch the market depth.
The best tool that will help in your SPAC investing journey is SPACrun. SPACrun is a definitive SPAC analytics tool that alerts its clients with SMS and emails in real-time. Check out what other investors think about the particular SPAC on Reddit. Get top 10 SPAC gainers and losers information and volume leaders every day. RSS feeds from different news portals to get you updated. Subscribe to SPACrun now and get a free trial.