The cannabis industry is a very lucrative market for potential investors, so you may be tempted to diversify your wallet by investing in marijuana stocks.
Now, when you consider the numbers, this industry becomes even more appealing.
According to Viridian Capital Advisors’ Viridian Cannabis Deal Tracker, investments in the marijuana sector went beyond $13.85 billion in 2018 — up from roughly $3.5 billion in 2017, with the average deal size above $23 million.
But as with any new subject, investing in marijuana stocks calls for some prior exploration. Although marijuana-related companies are reaching the mainstream, there are still some pitfalls linked to the booming market.
In this article, we’ll show you how to invest in marijuana stocks the right way — without going all arms and throwing blind guesses.
Investing in Marijuana Stocks 101: What You Need to Know
At MyKush, we believe that education and staying up to date with the latest news about the industry is important for all cannabis aficionados — especially those looking to invest in marijuana stocks.
However, as we get more and more questions on how to invest in these stocks, we’ve decided to compile a list of potential obstacles and how to deal with them on your way to becoming a green investor.
Let’s start with distinguishing between different marijuana stock markets.
The Problem With OTC and Penny Stocks
The biggest problem for all American companies — not only those US-based — is the federal prohibition of marijuana in the United States.
While many states in the US have legalized cannabis for either recreational or medical uses, allowing companies to launch and thrive, the plant is still a Schedule I substance under the federal law.
This makes it difficult for many companies to get listed on the Nasdaq or the NYSE.
Of course, businesses from the hemp industry have nothing to worry about, as hemp was removed in 2018 from the Controlled Substances Act. But with marijuana, it’s a different story.
Seeking alternative sources of raising capital, many entrepreneurs have chosen Canadian exchanges to go public, while others have decided to stay on over-the-counter (OTC) stock exchanges.
OTC or penny stocks aren’t subject to such strict control procedures as the major exchanges and the SEC impose.
According to Leslie Bocksor, investment banker and President of cannabis advisory firm Electrum Partners, OTC markets don’t have what it takes to allow for making as big moves as investors do on major stocks:
“The over-the-counter exchanges present challenges. They’re not taken as seriously as the bigger exchanges, and they also allow for a greater degree of latitude in terms of the quality of the company that will trade on them. As a result, many of the companies (…) that have something to do with cannabis probably shouldn’t be there. They got there because entrepreneurs thought it was the only way they could get access to capital; there was somebody that had a publicly traded vehicle that seemed like it would be a good fit,” Bocksor said.
Of course, this doesn’t mean that you should avoid penny stocks at all costs — there’s just prejudice against low-priced stocks that keeps investors from diversifying their wallet and reaching out to OTC-traded companies.
If you deem any of the OTC companies worthy of your investment, and you believe you’ve acquired enough knowledge to take the potential risk, the effort may be worth it.
How to Spot the Bad Marijuana Stocks
Now that we’ve established that not all OTC stocks are bad, how do you hash out the bad weed stocks and only make well thought out decisions?
There are plenty of options. One of them is to invest in ETFs such as Horizons Marijuana Life Sciences Index and the ETFMG Alternative Harvest.
These instruments are great for beginner investors because they carry cannabis stocks that have already been pre-chosen by teams of analysts who’ve researched them thoroughly and decided to include them in those ETFs.
A lot of stocks in Canada are overvalued right now because the market is already growing there. That’s why we recommend recurring to investment advisors and stock pickers who have been in the cannabis industry for quite some time now.
You can start focusing on some US cannabis stocks, as this market is still awaiting official regulation, showing as the next rush after the gold one — but in greener colors.
Companies like Marimed and Industrial Properties are doing quite well on the US weed market — just for the record.
A Step-by-Step Guide to Investing in Marijuana Stocks
To make things more digestible, we’ve put together a list of six steps to take when investing in marijuana stocks.
1. Do a Background Check on the Company
This should always be your main priority. Stay up-to-date with SEC filings and other documents required by regulatory bodies.
2. Determine How Much You Want to Invest
Rule number one here? Always invest just the amount you know you can afford to lose. Of course, decent research often breeds decent returns, but this will not always be the case.
Stocks can be unpredictable sometimes, so always err on the side of caution and remember not to succumb into the hot streak effect. Statistics like being merciless.
3. Decide When to Buy and When to Sell
Knowing when to buy and when to sell is essential for your success as an investor. Try to determine your thresholds beforehand to get a general idea when it’s a good time to retreat.
4. Select a Broker
Once you’ve done all of the above, it’s time to pick a broker. You can go the old way and go to a brick-and-mortar broker, or sign up with an online one. Both options will enable you to invest in marijuana stocks once you’ve registered and added funds to your account
5. Buy Your Stock
This step may sound obvious, but here’s the thing: there are two types of “buy” orders — market order and a limit order.
A market order will complete your transaction at the present market price, while a limit order will only do this if the price falls at or below a previously set limit price.
Despite a lower price of entry for an investor, there’s no guarantee that the limit order will execute.
6. Sell It
Once you’re happy with your returns from a stock, it’s time to sell it. Again, you can use either a market order or a limit order. Use part of your revenue to reinvest — or just spend them!
Final Thoughts on Investing in Marijuana Stocks
Investing in marijuana stocks creates ripe opportunities for both novice and seasoned investors alike. As with any booming market, the stake is high, but so is the risk. Taking anything for granted on a stock exchange can be a grave mistake, so no matter how good the news is, or how well you think you know the company you want to invest in, always use common sense and leave some funds back on a safe pile — you’d better be safe than sorry.
Do you invest in marijuana stocks? Or are you just planning to? Give us a shout in the comments!