Beginner’s Guide to Investing in Marijuana Stocks

Investing in marijuana stocks is an excellent way to show your support for the industry and to potentially make a profit as legalization expands around the world. Marijuana stocks are incredibly popular due to the industry’s growth, as well as the expectation of legalization in more countries in the future.  Before investing in marijuana stocks, you need to have some basic knowledge of stock investments overall as well as marijuana, and the understanding of how they fit together. 

What to Know About the Marijuana Industry

If you plan to invest in marijuana stocks, you are investing in the marijuana industry. As such, you should have a reasonable understanding of this industry, not just what strains you like and how to smoke cannabis. Understanding the marijuana industry is easier said than done, as it seems to be constantly changing.  Recreational marijuana is now legal in Canada, and medical marijuana is legal in more than 30 countries around the world. In the United States, one of the largest markets in the world, cannabis remains illegal at the federal level. However, more than 30 of the 50 U.S. states have legalized at least medical marijuana, with a growing number also legalizing recreational marijuana.  The expectation for the industry is that legalization will spread, opening up more potential markets for companies. 

What to Know About Hemp

As you look for potential investments in the marijuana industry, you will notice that some of them may focus on hemp or include it in addition to marijuana. Because of this, you need to know a little bit about hemp as well.  In 2018, the United Legalized hemp, provided that it has a THC content of less than 0.3 percent. THC is the chemical responsible for the psychoactive effects of marijuana. Because hemp is now legal across the United States, there are many more opportunities to invest in hemp-related U.S. stocks than those generally related to marijuana.  Additionally, there are many companies that produce products based on hemp, including those containing CBD. CBD is non-psychoactive and shows medical and therapeutic potential, making it very popular. 

Types of Marijuana Stocks to Invest In

With your basic industry knowledge out of the way, it is time to take a closer look at the types of marijuana stocks that you could invest in. Most experts divide marijuana companies into three categories: growers, biotechs, and products and services. 

Growers

These companies cultivate marijuana plants. They usually do so indoors in greenhouses. 

Biotechs

Many biotech companies focus on cannabis and cannabis-based research. The main focus is on the development of prescription drugs that rely on the ingredients in cannabis. 

Product and Service Providers

These companies serve or provide products to biotechs and growers in the cannabis industry. They include companies that offer distribution, consulting, packaging, lighting, and hydroponics. 

Other Cannabis-Related Companies

If you are willing to expand your definition of a marijuana company to also include hemp companies and those who produce other cannabis-based products, you will have yet another category to consider. Sticking to marijuana, this would be the companies that produce edibles using marijuana from growers.  In the case of hemp companies, it could include companies focused on offering CBD and a full range of CBD products, which include oils, tinctures, edibles, topicals, and more. 

How to Evaluate a Marijuana Stock

The process of evaluating a marijuana stock to determine if you should invest in it is the same as what you would do to evaluate any other type of stock. The caveat is that because the marijuana industry is comparatively new and is still constantly changing, your research is even more important. 

Management Team

Start by looking at the management team of the company, including their experience and plans. Pay particular attention to similar companies and look for indications that their past experience will improve the results of the current company. 

Strategy

Explore the strategies of the company, including surrounding expansion and growth. An example of what to look for would be whether the company plans to grow organically or via acquisitions. 

Competition

You also need to look at your chosen company in terms of the competition. The marijuana industry is incredibly competitive, and it becomes more competitive as it grows. Your chosen cannabis stock should have something that sets it apart from the others. 

Profits

It is also wise to look at the financial statements of the company and see whether it is already profitable. Do not eliminate a company just because it is not yet profitable, as the industry is still young. However, you should pay attention to when currently unprofitable companies think they will become profitable and their funding methods in the meantime. 

Geographic Markets

Do not forget to look at the primary geographic markets that your chosen marijuana stock is targeting or plans to target. So far, most of the larger growers will have operations in North America, Latin America, and Europe, while smaller ones tend to focus on Canada. Each market has its own benefits and risks, requiring further research. You will need to look into predictions for that particular geographic market to make an informed decision. 

Consider Investing in Marijuana ETFs Instead

If you are unsure about investing in marijuana stocks, there is also the option of investing in a marijuana exchange-traded fund. Abbreviated as ETFs, these let you purchase multiple related stocks.  This is a good way to diversify your marijuana stocks. However, keep in mind that ETFs come with higher expenses, and it will be harder to find ETFs with significant holdings of U.S.-focused marijuana stocks. 

Understand the Risks of Marijuana Stocks

Investing in the stock market always comes with an element of risk, but there are also some additional risks that are specific to investing in marijuana stocks. The following risks include both those that apply to all stocks and those that only apply to marijuana stocks. 

Market Caps

Market caps on most of the marijuana stocks are higher than the companies’ historical sales. As such, investors should know that the valuation of these stocks depends on the expectation that they will grow significantly. It is possible for the prices of shares to drop quickly if the expected growth does not come as rapidly as the market expects. 

Lack of Current Profits and Dilution 

As mentioned earlier, not all marijuana companies that offer stocks will already be profitable. Some companies that are not yet profitable may issue new shares to get the funds they need. However, issuing additional shares leads to dilution.  Dilution is problematic for you as an investor because it means that the same market cap is being divided into even more shares. The more shares that are added, the lower the value of each share, assuming that the market cap is not changing. 

Legal Risks of the Companies 

Some marijuana companies also face legal risks. For example, if you choose to invest in a U.S. company that operates in one of the states that have legalized marijuana, there is also the risk that the federal government would begin enforcing federal marijuana laws, regardless of state laws. This is highly unlikely to occur, but the risk does still exist. If that were to happen, any U.S.-based marijuana companies would be likely to dramatically lose value or close completely. 

U.S. Companies Face Banking Challenges

Because of the federal law that makes marijuana illegal, cannabis companies in the United States also face other challenges, such as banking. Many banks still will not work with cannabis companies because they are illegal at the federal level. Banks do not want to take the risk that the federal government will pursue marijuana companies, as this would result in a loss for them if they provided payment processing or held the companies’ funds. 

Marijuana Stocks and ETFs to Consider Investing In

With the above advice in mind, here are some of the most commonly suggested marijuana stocks and ETFs to invest in. Remember that you should always do your research on any company, including the following ones, before investing in marijuana stocks. The market is constantly changing, and it is generally good to get in when prices are low to sell high. As such, you may want to watch some of the following brands for a little before you invest. 

Aphria

Aphria is a producer of medical marijuana and CBD. It offers a nice catalogue of CBD-based products and is part of the drive to include CBD in the mainstream. Those in the industry expect this company to grow as the demand for CBD products increases. 

Constellation Brands

Constellation Brands is not only related to the marijuana industry, but it also owns Modelo and Corona. As such, it is already well-established and has a strong reputation. The company is still new to cannabis compared to its other projects, but its rich history shows that company leaders know what they are doing. It also helps that Constellation Brands has started a partnership with Canopy Growth, which is among Canada’s largest growers. 

ETFMG Alternative Harvest 

This is an ETF related to cannabis that is highly diversified. It contains stocks from various aspects of the cannabis industry, including service providers, cultivators, pharmaceutical companies, and even tobacco companies that are getting involved in marijuana. 

GW Pharmaceuticals

You already missed one big opportunity to invest in GW Pharmaceuticals before the U.S. Food and Drug Administration approved its Epidiolex drug, the only FDA-approved drug with CBD. Even so, experts predict that this company has a bright future given that the company is working on additional cannabinoid products. 

Innovative Industrial Properties

Innovative Industrial Properties is a real estate company that focuses just on cannabis. The business owns properties and only leases them to cannabis-based businesses, which have a notoriously hard time finding places to rent. The company has around 50 properties across multiple states, and that figure will likely grow. Innovative Industrial Properties has already made it clear that it plans to expand as the legalization of marijuana grows. 

Valens

Valens provides cannabis extraction services. To show its promise, it already has contracts with major players in the world of cannabis, including producers like Tilray, HEXO, and Canopy Growth. Additionally, Valens made deals to be able to extract THC and CBD from the plants, then sell edibles and oils, which are very hot commodities. 

Remember: Never Invest More than You Can Afford to Lose

As you choose which marijuana stocks to invest in, always keep in mind the important rule of never investing more than you can afford to lose. The stock market is hard to navigate, and it can rise and fall then rise again in quick succession. As such, you should always make sure that you feel comfortable losing up to the amount that you invest.  In the best-case scenario, you will make a profit in the high-risk and high-reward market of marijuana stocks. Remember that because the marijuana industry is still new, many of the companies in it will fail at some point, which could cost you money if you invest in them. At the same time, it is a given that many will succeed, giving their investors a hefty profit in the process. The trick is figuring out which ones are most likely to bring you success. 

Conclusion

For those who want to get involved in the marijuana industry to make a profit or to just show their support, investing in marijuana stocks is a way to achieve those goals. The marijuana sector of the stock market is still new, providing the potential for high rewards, along with some heavy risk. Always do your research before investing in marijuana stocks, as this will increase your chances of a successful investment. You should find plenty of options across the industry, from cannabis growers to biotech companies to those who provide services to those companies to companies that produce cannabis-based products. Marijuana ETFs are also worth considering for their built-in diversification.