The cannabis market is one of the fastest-growing globally. As such, numerous publicly traded companies have stocks and other marijuana-related assets on the market. So, when thinking of how to invest in cannabis stocks, the opportunities are endless. But what’s the best approach to finding the best options? Keep reading!
An Overview of the Cannabis Industry Landscape
According to data from Forbes, the marijuana market is expected to grow from $30 billion in 2021 to $55 billion in 2026. The massive growth in the cannabis industry is due to the presence of investment opportunities across different companies.
These companies provide marijuana products and services to the global market. However, one of the major setbacks for the marijuana industry is regulation. The industry is still largely untapped because of regulatory restrictions in many countries.
The market is slowly expanding with recent regulatory frameworks from countries like Canada. Many pot companies provide various investment opportunities to people looking to buy cannabis or invest in Marijuana-based products or shares.
However, if you live in the U.S., it’s essential to know that cannabis is still considered an illegal substance by federal laws per the Controlled Substances Act (CSA) of 1970.
Cannabis companies with stocks or other marijuana-related financial products in the U.S. are mainly illegal at the federal level.
Some U.S. states like Colorado, Alaska, and Washington, D.C. allow marijuana use for recreational purposes. Nonetheless, it’s essential to understand what the laws say about cannabis investments in your region before choosing marijuana investment options.
Understanding Medical and Recreational Cannabis Stocks
The products from the marijuana market are divided into two main classes: medical and recreational cannabis. Similarly, marijuana stocks belong to these two broad categories.
Medical Cannabis (MMJ)
As the name implies, marijuana companies produce medical cannabis for medicinal purposes. These companies make unprocessed cannabis and marijuana-based products using cannabinoids – a group of substances found in the cannabis plant.
Physicians and medical researchers believe cannabinoids can help manage diseases like Alzheimer’s, cancer, epilepsy, and sclerosis by relieving some of their side effects. Medical marijuana is legal in countries like the UK, Canada, Australia, and Germany.
So, most cannabis companies are involved in the cultivation and production of marijuana for medicinal purposes. However, while the medical use of cannabis is legal in some U.S. states, including Colorado and Alaska, it’s still illegal at the federal level.
Recreational Cannabis (RMJ)
The recreational usage of marijuana is also legal in some countries like Malta, Uruguay, and Canada. Similarly, some U.S. states like Washington, Massachusetts, and Colorado consider the recreational use of cannabis legal. So, marijuana companies can operate in these jurisdictions and provide products and services to recreational users of cannabis.
In essence, if you’re thinking of how to buy cannabis stocks, you can find a marijuana company that aligns with your needs or investment goals from these two classes.
Key Players in the Cannabis Business
Before investing in cannabis stocks, it’s important to understand how the businesses are categorized and their roles in the broader marijuana space. Doing so will help you make informed decisions about how to invest in cannabis stocks.
At the same time, you’ll have a better understanding of the different business operation models in the cannabis industry and find the ones that best align with your investment needs.
Now, let’s take a look at the types of businesses in the marijuana industry.
Growers and Dispensaries
These are cannabis companies that grow their own marijuana and sell the plants. You can draw a parallel from these companies to cannabis products sold at dispensaries. In other cases, some companies double as growers and dispensaries, so they plant, sell, and distribute cannabis to individual consumers and businesses.
Not many businesses operate at this level due to legal constraints. However, you’ll find medicinal and recreational cannabis companies like Curaleaf Holdings and Ultra Health dominating the growers and dispensaries landscape.
Biotech Companies
Biotech cannabis companies concern themselves with the medicinal use of marijuana. These firms research and develop medical cannabis products for consumers. Some biotechs develop these products using cannabinoids, while others use synthetic forms of cannabis for their drugs. But stocks from biotech firms are also considered cannabis stocks.
Popular global cannabis biotech firms include Cresco Labs and Tilray Brands.
Ancillary Product/Service Providers
Unlike the previous two categories, ancillary product and service providers are cannabis companies that don’t cultivate or process marijuana plants. Instead, they support other marijuana companies with the tools, materials, and other products and services to enhance their businesses.
For instance, they provide packaging materials, farm lighting services, fertilizers, and other professional services to growers and biotech companies. Popular brands in this category include Innovative Industrial Properties and GrowGeneration.
Some cannabis companies offer unique marijuana stocks you can add to your investment portfolio. But the closer a company is to the plant, the riskier their investments.
Risks Associated with Cannabis Stocks
Though investing in cannabis stocks can be rewarding like stocks from other industries, the marijuana market is unique and has associated risks you should know. We highlight the downsides of investing in cannabis stocks below.
Legal Challenges
One significant challenge of trading marijuana products and investment options is legality. The global cannabis industry is still emerging, so many countries, including the U.S., consider marijuana trading illegal. For instance, U.S. federal laws prohibit using and selling cannabis for all reasons.
Because of this, banks and other institutions often refrain from working with cannabis-related businesses, as there are strict laws against this from the U.S. government. Though there has been more clamor for the federal legalization of marijuana by some political bodies, only time will tell if the government will budge.
Business Risk
The marijuana business is high-risk, so the average investor is wary of buying cannabis stocks or investing in marijuana-focused companies. As such, an upcoming cannabis production or distribution company may struggle to scale or successfully run its operations due to difficulties around revenue generation.
Ultimately, if the business runs down, investors will lose money.
Valuation Concerns
Another potential drawback to investing in marijuana stocks is the inconsistency around valuations. While cannabis stocks have experienced rapid price growths, companies’ valuations do not particularly represent their potential growth or profitability – since the industry is still yet to be fully established.
For instance, when cannabis businesses do their valuations, they hardly have existing business fundamentals to base them on. Instead, they estimate values based on optimism rather than actual market realities. In other words, a company’s stock may fail to reach its proposed potential.
Demand Fluctuations
Finally, there’s a constant imbalance in the demand and supply of cannabis in the agricultural or medical sectors. For example, Canadian marijuana companies experienced an increased demand for cannabis after the country announced its regulatory plans. However, the demand dropped after the market corrected, and businesses had to cut down on production.
These demand irregularities can result in stock price falls.
Steps to Invest in Cannabis Stocks
Now that you know the kinds of companies offering investment opportunities in the cannabis industry and the potential risks to be wary of, it’s time to kickstart your cannabis stock investment journey.
Step 1: Choose a Reputable Broker
The first step is to find a safe online brokerage to buy and sell cannabis stocks. The best online brokers have a wide range of stock options, are beginner-friendly, charge low fees, and employ stringent security features to safeguard their customers.
After choosing the best exchange, create a new online brokerage account by providing your basic information and undergoing the identity verification process, if applicable.
Step 2: Decide Between Individual Stocks and ETFs
Before choosing the pot stocks you want to invest in, you must determine if you wish to buy individual stocks or diversify your portfolio with cannabis exchange-traded funds (ETFs).
Individual cannabis stocks are shares of publicly traded marijuana companies. These companies are listed on stock exchanges, and you can find them on the New York Stock Exchange (NYSE), NASDAQ, and the Toronto Stock Exchange (TSX).
Conversely, cannabis ETFs are alternative investment opportunities that combine different baskets of marijuana stocks in one place. However, ETFs often have lesser returns compared to individual stocks.
Step 3: Research
After finding the most preferable stock or ETF option, do due diligence before committing funds. Check the company’s history, financial statements, previous stock performance, projections from market experts, etc.
Step 4: Monitor Your Investments
After buying your most preferred cannabis stocks, ensure you monitor your portfolio to see how you’re faring. Sometimes, you may need to make adjustments in line with the current market realities.
Step 5: Diversify Your Investment Portfolio
The rule of thumb when investing in stocks is to avoid putting all your eggs in one basket. Diversifying your portfolio will help you reduce potential risks.
Top Cannabis Stocks and ETFs to Watch in 2023
To help demystify your research process, we highlight below some of the best cannabis stocks and ETFs worth a look in 2023:
- Curaleaf Holdings (CURLF)
- Canopy Growth (CGC)
- Trulieve Cannabis (TCNNF)
- ETFMG Alternative Harvest ETF (NYSEARCA: MJ)
- Horizons Marijuana Life Sciences ETF (OTC: HMLSF).
The Future of Cannabis Stocks and the Industry
The cannabis industry is rapidly evolving – thanks to regulations from countries like Canada, Uruguay, and the UK. Many cannabis-focused firms will continue to expand in these regulatory-friendly locations, but legality and regulation will continue to drive more adoption in the industry.
Additionally, we’ll continue to see famous food and beverage companies like Heineken and Molson Coors Brewing Co. producing cannabis-infused products as policies continue to ease around the planting and use of marijuana.
With more such companies diving into the marijuana industry, there will likely be more types of cannabis stocks and ETFs that traders and investors can invest in.
However, banking will remain a significant challenge because the cannabis industry is high-risk, and financial institutions often avoid it. Nonetheless, business owners in the marijuana space will constantly evolve and adapt to the new market realities, especially its legal landscape.
More countries will also decide on the regulatory frameworks around marijuana cultivation, consumption, and distribution.
My Final Thoughts
Global cannabis sales are expected to increase from $13.4 billion in 2020 to $148.9 billion by 2031. So, we have only scratched the surface of what the marijuana industry promises. In this article, we’ve reviewed how to buy cannabis stocks and the associated risks of investing in marijuana companies.
When choosing the cannabis stocks to buy, remember that some stocks are relatively safer than others. For example, companies that don’t have their entire revenues from the cannabis industry face fewer risks. However, do your research before investing in any cannabis-based asset or company.
FAQs
How will federal legalization impact cannabis stocks?
A change in the US federal regulation can significantly transform the cannabis industry. More banks will be open to working with marijuana industries if permitted, and there’ll be more demand for cannabis products and stocks. However, it can also lead to stricter guidelines from the government.
What are the primary differences between medical and recreational cannabis stocks?
Medical stocks are shares from companies focused on offering marijuana products and services for biotech/medicinal purposes. Recreational cannabis stocks are from companies that provide marijuana to individuals and corporate firms using marijuana for leisure or entertainment.
How volatile is the cannabis stock market?
The marijuana stock market is quite volatile because of its dependence on external factors like regulation. There can also be price swings due to macroeconomic factors, so investors should brace themselves for these possibilities.
Are there any cannabis ETFs you can invest in?
Yes, there are numerous cannabis ETFs on the market. These ETFs provide investors with a basket of investment options to diversify their portfolios. Examples include the ETFMG Alternative Harvest ETF (MJ) and the Horizons Marijuana Index ETF.
What factors should you consider before investing in a cannabis company?
Some of the things to look out for before investing in a cannabis company include the company’s financial reports, management team, stock market position, and valuation. However, a company looking good on paper isn’t tantamount to less investment risk.
Are cannabis stocks overvalued?
Sometimes, some cannabis companies can overvalue their stocks due to the industry’s less-grounded structure and the owners’ optimism. So, it’s crucial to thoroughly research a company’s stock and valuation before investing.
You Can Read Next:
Why You Can Trust The Marijuana Index
The information provided on Marijuana Index is solely for educational purposes. The selections presented here are the product of meticulous analysis by an experienced financial analyst. However, it’s crucial to remember that these choices may not universally fit every portfolio.
Before making any investment decisions, we strongly encourage you to conduct thorough research. This ensures that any potential investment aligns with your unique financial goals and risk tolerance.
As of the date this article was written, the author does not hold any positions in the stocks or ETFs mentioned.
We do not provide personalized financial advice, advisory services, or brokerage recommendations. Nor do we advocate for the purchase or sale of specific stocks or securities. Please be aware that performance information might have changed since publication, and past performance should not be seen as an indicator of future results.
Investing in cannabis stocks carries its own set of risks, reflective of the evolving legal landscapes and market volatility inherent in this industry. As an investor, it’s essential to be aware of these risks and consider them carefully in your decision-making process.
To understand more about our commitment, we encourage you to learn more about us. If you have more questions for our cannabis specialist editors, do not hesitate to contact us. You can also send us a tweet at @Marijuana_index. Stay updated with the latest cannabis news by subscribing to our Newsletter.
Tobi Opeyemi - Financial Writer
Tobi, a journalist and crypto writer since 2017, is renowned for his educational content in the digital currency realm. His journey includes a significant tenure with Stockbossup, an investment platform committed to enlightening the black community on financial matters. Before this, Tobi honed his skills as a copywriter at Turboxbt, a platform specializing in cryptocurrency trading. Notably, Tobi's insights are featured on Investopedia, where he contributes articles on a range of topics. He is also celebrated as one of the top web3 creators on LinkedIn, known for content that consistently drives engagement and sparks conversations in the industry. With a background in Pharmacy, he brings a unique perspective to his writing, especially in the Cannabis sector.
