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6 Things To Know Before Investing In Cannabis Stocks

5 things to know before investing in cannabis stocks

Business

6 Things To Know Before Investing In Cannabis Stocks

The cannabis market is soaring, but before you invest in cannabis stocks, here are some things to keep in mind.

So You Want to Invest in Cannabis Stocks? Here’s What You Need to Know

Cannabis stocks have soared in recent years thanks to growing legalization. At this point, medical cannabis is legal in 28 U.S. states. Recreational weed is legal in eight states including Washington D.C., and on top of all that, the Canadian government just announced plans to legalize weed by July 1, 2018.

The cannabis market is generating some serious economic activity. It’s creating loads of new jobs. Legal cannabis sales are on pace to hit $22 billion by 2020. And by 2026, the market will climb as high as $59 billion.

Already in Colorado, where recreational and medical cannabis are legal, excise taxes on cannabis far exceeded that of alcohol in 2016. More states than ever before are now making moves to decriminalize and legalize weed.

All of this adds up to some potentially lucrative investment opportunities. But before you take the plunge and invest in the cannabis market, here are six key things to keep in mind.

1. Cannabis is Still Classified as “Schedule I Drug” in the United States

5 things to know before investing in cannabis stocks

Like heroin, cannabis is still considered a “Schedule 1 drug” by U.S. federal law. Because of this, many banks and credit unions are wary of doing business with anyone involved with the cannabis industry.

Since most cannabis businesses lack access to basic banking services like opening lines of credit or checking accounts, they’re often forced to become cash-only operations.

Investors should be warned that this creates quite a financial security risk. According to Nasdaq, the unsure legal footing of the cannabis industry means that weed companies have to do things a little differently than other companies. As a result, investors run the risk of getting involved in a number of scam companies.

2. The U.S. Isn’t the Only Country with a Cannabis Stock Market

5 things to know before investing in cannabis stocks

There are plenty of investment opportunities in other countries. Most notably, in Canada.

Immediately after the government announced plans to achieve legalization by July 2018, Canadian cannabis stocks began spiking. One analyst said weed-related stocks were “on fire.”

As the country follows through on its plans, expect those stocks to remain strong. So if you’re considering buying cannabis stocks, consider buying them from Canada.

3. Penny Stocks Will Likely Leave You Penniless

5 things to know before investing in cannabis stocks

Unfortunately, the majority of cannabis stocks are sold as penny stocks, traded for less than $5 per share outside the major market exchanges.While their low prices may initially seem appealing, be cautious, as they come with a lot of financial

While their low prices may initially seem attractive, be careful. Penny stocks come with a lot of financial risks. Their promise of massive gains is more often met with loss than reward.

“When there aren’t many shares traded regularly for a given stock,” The Motley Fool explains, “investors often can’t buy or sell at their preferred price. Higher trading volume creates more liquidity and lower bid/ask spreads.”

Penny stocks for cannabis are typically sold over-the-counter. This leaves them highly speculative. It also means that there are less public disclosure and regulatory standards.

And so far, cannabis companies haven’t had success moving off these smaller markets and into the more mainstream ones. In 2016, for example, Nasdaq denied cannabis tech company MassRoots’ request to be included in their bigger, more regulated market. Nasdaq said it was because MassRoots was “aiding and abetting the distribution of an illegal substance.”

Bottom line: Penny stocks are more of a gamble than an investment.

4. If Cannabis is Rescheduled, the FDA Could Gain Control

5 things to know before investing in cannabis stocks

That means that even if Congress and the DEA reschedule cannabis from a Schedule I to a Schedule II drug, the Food and Drug Administration would then be in charge of the marketing and packaging of cannabis products.

They’d also control “the manufacturing and processing of medical cannabis, may make the industry run costly and lengthy clinical tests to demonstrate the effectiveness of marijuana in treating certain ailments,” according to The Motley Fool.

This could seriously damage smaller cannabis businesses in the long-run.

5. Some States Have Better Stocks Than Others

5 things to know before investing in cannabis stocks

If you’re looking to invest, keep your eye on cannabis companies in states that have legal medical and recreational weed. Not surprisingly, these states are the frontrunners in the cannabis industry and are already seeing some big time market activity.

For example, Colorado has already seen  over a billion dollars in revenue from recreational marijuana sales. And other states with legal weed are in the same ballpark.

The legal weed markets in these states are expected to continue their explosive growth. According to GreenWave Advisors, LLC, these states will have the best cannabis stocks by 2020.

However, be wary no matter where you choose to invest. Changes in pricing dropped significantly in Colorado and California last year, which means companies may have to step it up and create higher-quality products if they want to continue to compete in the ever-changing market.

Look for companies with solid marketing and administrative teams. And be sure they have business plans in place that make sense and are accessible to the public.

6. Remember That It’s Always Risky Business

5 things to know before investing in cannabis stocks

There’s no denying that the cannabis industry is hot. But that doesn’t mean that every company is worth investing in, nor does it mean that every company that is profitable now will remain profitable later.

Know your purpose and have a sense of how much you are willing to invest and what you are willing to risk. Remember that the stock market is volatile, and there’s never certainty about which investments will produce profits or how much they’ll produce.

Most investment professionals suggest steering clear of having to borrow money to execute your stock strategies.

“Ideally,” advises Money Crashers, “you should start saving as soon as possible, save as much as you can, and receive the highest return possible consistent with your risk philosophy.”

There are also, of course, varied opinions and heated debates online about which companies are the best to invest in, and even if cannabis stock investments are worth it at all.

As with any stocks you consider buying, do your due diligence and research each company closely. Think long-term, and seek out companies that are reputable, financially strong, and that have a solid plan for growth.

Julia Rubin

Julia Rubin is a Brooklyn-based author. Her work has appeared in publications like the North American Review, The Lascaux Review, and Sierra Nevada Review, and she has written for a variety of online media companies like AllDay and Wetpaint Entertainment

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