What You Need to Know Before Investing in Cannabis Stocks

Michael Jacobs  |

With so many states legalizing either the medicinal or the recreational use of marijuana, and some entire countries following suit, many investors are wondering about how they can get into the game. It is not just legalization pushing this desire to find cannabis investments, it is also the fact that by 2020, the legal cannabis industry in the United States is expected to be worth $21.8 billion. Investment firm Cohen & Co. is expecting that to grow to $50 billion just 6 short years later.

Those numbers make investors drool with the possibilities of raking in big time profits through cannabis stocks. Yet, there are things that need to be taken into consideration if you are planning on investing in this high-growth but risky industry. Here are just a few of those issues for consideration.

The Breakdown

One key factor in stock growth is industry growth. There are more things to invest in the cannabis industry than just the plant itself. There’s pharmaceuticals and research, grow operations, consumer products, and more. While pharmaceuticals may have the most potential for net worth and growth, consumer products like vaporizers shouldn’t be ignored. Here’s a breakdown of the potential worth of each sector:

  • Pharmaceuticals and Research: $1.5 billion
  • Producer/Grower: $645 million
  • Consumer Products: $302 million
  • Real Estate: $216 million
  • Consulting: $170 million
  • Technology: $162 million
  • Industrials: $54 million

As you can see, the third largest sector financially is consumer products. This would encompass everything from glass bowls and wrapping papers for joints to both portable and desktop vaporizers.

Further Expansion May Be Slow

Right now, and in the near future, there may be more competing products vying for the dollars of just a select group of people living in certain legal jurisdictions. Eight states and the District of Columbia have legalized recreational cannabis along with medicinal cannabis. A further 20 states have legalized just the medicinal use of the drug. However, further expansion may be slow. Although a recent Gallup poll showed that 51% of people identifying as Republican now favor legalization, those in charge of the remaining states are not very pro-cannabis. There’s also Attorney General Jeff Sessions, who is no big fan of cannabis.

Caveat Emptor (Buyer Beware)

There’s no shortage of cannabis stocks to choose from if you’re wanting to invest. The drawback is that the majority of these stocks are OTC stocks. This is because exchanges like the New York Stock Exchange (NYSE) and Nasdaq have very strict market-price and share-cap requirements. Most cannabis stocks cannot meet these (yet), so they are traded on the over-the-counter boards (OTC). This can make it difficult to get up-to-date information on the stocks you may be considering for your portfolio. This market is also more volatile and may be best left for the aggressive, seasoned investor who is willing and able to take a loss. If you’re more conservative, these stocks may not be for you.

Taking a Loss

If you were an adult in the late 90s and early 2000s, you might remember the dot-com bubble burst. It happened because losses were overlooked thinking that the eventual gains would save the day. At the moment, most cannabis stocks are losing money. One major question any investor should consider before buying is whether or not the company has the capital to get through the fledgling years of an industry which is just beginning to develop.

Trade on the NYSE or NASDAQ

Penny stocks on the OTC market are volatile, and you can take a huge loss just as effectively as you can take a huge windfall. However, companies like GW Pharmaceuticals (GWPH), Insys Therapeutics (INSY), and Zynerba (ZYNE) are considered biotech firms and not “true” marijuana stocks. Another company, Innovative Industrial Properties, listed on the NYSE, is a REIT that invests in grow operations but is considered a real estate company. If you want to ensure your investments are all above-board and not subject to scrutiny from the Securities and Exchange Commission, these may be investments you wish to make.

Investing in marijuana may prove to be a beneficial, and profitable investment. However, like with all investments, there is also the very real chance of taking a loss. It would be prudent to discuss any investments you may be planning on making with a licensed financial planner before taking the plunge. As always, do your research first.

While getting in on the ground floor of the cannabis industry may be the way to huge profits, it can also spell out huge losses if things don’t progress as quickly or if the federal government decides to crack down. Keep your ear to the ground!

Michael Jacobs is a marketing and creative content specialist at GotVape.com with a primary focus on customer satisfaction. Technology and fitness combined with healthy lifestyle obsession are his main talking points

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.

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