In the past decade, a multitude of cannabis-related companies went public throughout the Canadian and American markets with their stocks making strides on the NASDAQ as well as NYE. Labeled as the “green rush”, this period was characterized by large-scale public attention in news and hysteria as cannabis companies began attracting sizeable amounts of investments from investors around the world.
A few years down the line, these stocks became highly volatile due to significant loss of investor confidence and lack of profitability. As restrictions worsened, the situation aggravated for these marijuana investors and entrepreneurs. Eventually, the bubble burst, and investors were left contemplating their positions.
This gives us a fair understanding of the ‘marijuana bubble’. With the news of cannabis legalization in various parts of the U.S., these stocks have started picking up the pace yet again. Should you indulge in the upcoming boom in the marijuana industry, make sure to keep in mind these simple considerations.
Three-Step Guide on how to trade Marijuana Stocks like an Expert
1. Understanding the marketplace
It is vital for an investor to understand prima facie, the marijuana market, and its products before indulging or speculating in the same. Like every investment requires due diligence, this one is no different. Marijuana products can be broadly divided into two categories which are- first, for medical purposes, and second, for recreational.
While the former is widely legalized in 35 out of the 50 states in the U.S., the use of the latter is restricted in the majority of the states. Although an authorized prescription from a healthcare body is required for individuals to obtain marijuana for medical purposes, only adults above the age of 21 are allowed by law to make use of the drug.
2. Understanding marijuana stocks
Once you have a clear understanding of the cannabis market, the next key step is to understand the plethora of marijuana stocks out there. While some companies cultivate and harvest cannabis for commercial use, the other lot focuses on operating retail outlets which further sell it for medical or recreational purposes. There are also a few listed biotech companies that develop the cannabinoid drug.
Furthermore, there are also several marijuana ancillary stocks of companies that facilitate the function of various marijuana cultivators. A safer bet could be identifying the best stocks on the Horizons Marijuana Life Sciences Index ETF for better and clear understanding.
Indices like these make it easier for investors to speculate and identify the best performing marijuana stocks. Further, these stocks are backed by experts and analysts who have performed the essential due diligence on such companies and indices.
Besides, investors like Alan Brochstein or Jeff Siegel are widely known for investing in such “green chip stocks” and people often follow their footsteps while making an investment in the same.
3. Understanding the risk involved– don’t just go by cannabis news
Any form of investment is likely to bring about certain risks and so is the case while investing in marijuana stocks. Even though the commercialization of marijuana is evolving, the sale of the drug still remains illegal in many states and the federal law of the United States has imposed several restrictions on banks and other financial institutions while lending funds to such companies.
Though political support of decriminalizing marijuana has gained traction, there is no guarantee that it will become unanimous across the states.
Further, Marijuana is also subject to imbalances as far as supply and demand are concerned. Many transactions are also oftentimes recorded ‘over the counter’ and several corporations have cut back production due to falling prices. Due to this, marijuana cultivators and producers often fail to establish an equilibrium leading to fluctuating revenues.
Coming back to over-the-counter transactions, most OTC stocks aren’t required by statute to file their financials– a key component for an investor for making a sound investment. Also, these stocks often have a low level of liquidity as they do not have to maintain a minimum market cap. Most marijuana-related companies have restrictions while going public on a mainstream exchange and so they seek to find alternatives to raise capital, hence resorting to OTC transactions.
This also gives them the privilege of low-level of scrutiny imposed by the SEC.
Further, there are many financial constraints in investing in cannabis stocks. Usually, these companies are not profitable and illiquid so they raise funds through the issue of new shares, hence diluting the value of existing shares with the investors. Hence, a sound and aware decision is to be made by the investor when aiming for investment in the cannabis industry.