What You Need to Know to Invest in Cannabis Companies

Brian O'Connell  |

Seeing as how cannabis companies have exponentially grown over the last few years, there’s a good chance you’re thinking about investing in them. There is no doubt about it - the marijuana industry is now hotter than ever. With a compound annual growth rate of 22 percent over a five-year forecast period, the cannabis industry is expected to reach more than $32 billion in consumer spending by 2022.

While capturing a piece of this growth sounds very appealing, there are some real risks associated with investing in these companies. Although all stocks carry some form of risk, the cannabis industry is especially tough. The main problem is that marijuana is still classified as a Schedule I drug by the DEA, even though it is currently legal in certain states. This means that most companies simply can’t get listed on the New York Stock Exchange or the Nasdaq. Therefore, many businesses have started trading via penny stocks on the Pink Open Market, the lowest tier of OTC Markets, to raise visibility and capital.

Since these stocks have no financial standards or disclosure requirements and have only limited regulatory oversight, you will have to do a lot of research before you start making investments. This can be quite tricky if you’re new to making investments and don’t know what type of information you’re searching for. First of all, you need to know what exactly you’re investing in. Namely, you should know if it is a farm, retailer, technology or something else. The pharmaceutical companies have seen the most success thus far, but other sub-categories like growers, consumer products, technology, consulting and real estate are also worth exploring.

Keep in mind that companies that trade via penny stocks don’t have to file audited financial reports with regulators. This means that insiders are able to easily manipulate stock prices and business can exaggerate when they make certain claims. Because there are a lot of fraudsters and bad actors out there, it’s important to properly vet a company before making an investment. In case you can’t find a lot of information about a certain cannabis company, then you shouldn’t invest in it.

Finding the best cannabis stocks can be quite difficult. Even though you can never truly know whether a certain company will be successful, you can increase the likelihood of getting a substantial return on your investment by checking key information. For instance, you should find out whether the people running the company you want to invest in have any experience in the cannabis industry. Never invest if they don’t. Outsiders simply aren’t aware of how challenging this industry is.

It’s also important to check if the team leaders have had success with previous businesses. Having the right people in charge will certainly help the company grow. Finally, you should find out if the business you want to invest in has been rebranded from a previous corporation or entity name. This can be a big red flag, as it could mean the owners are trying to cover up their previous failures.

After you’ve decided to invest in a certain cannabis company, it’s time to determine how much money you want to put into it. In case you don’t have a lot of experience, know that you should never invest more than you can afford to lose. Don’t get caught up in the hype and put all your money in one company. Instead, you should start small and make at least a few investments in different businesses. It’s also essential you determine your investing timeline. Some people are comfortable with waiting for years, while others prefer day trading.

The bottom line when it comes to investing in cannabis companies is that this is a multi-billion-dollar industry in its early stages, and you have a rare opportunity to get in on the ground floor. Nevertheless, since you’ll often be trading in penny stocks, you should approach every potential investment with extreme caution in order to protect your funds.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not 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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