The legal cannabis stocks industry is one of the fastest growing industries in the US. Arc View, a leading cannabis research company projects a compound annual growth rate of 26% up to 2021. Annual sales will be worth about $22 billion in 2021.
Are Cannabis Stocks Ever Safe Investments?
The value of cannabis stocks is equally growing. The North American Marijuana Index, that tracks 39 leading cannabis stocks, gained over 90% in 2017. Cannabis stocks have been rising because unlike before, many people now favor the idea of legalizing cannabis.
That being the case, is it safe to invest in cannabis stocks?
We share a few tips to help you make an informed decision.
1. Are Cannabis Sales Growing?
In the US, 29 states have legalized medicinal cannabis, nine of which have taken the further step of allowing cannabis for recreational use. Next door in Canada, Prime Minister Trudeau said that Canada will “go green” by July 1, 2018.
Other countries such as Israel, Australia, Uruguay, Netherlands, Colombia, and the Czech Republic allow some use of cannabis. Many more countries are taking significant steps to decriminalize cannabis—even if they don’t fully legalize it.
That’s a big market and it is expected to grow even more. Companies can invest in these countries. This means you are safe investing in cannabis stocks.
2. Which Cannabis Sector Do You Want To Invest In?
You can invest in cannabis through a variety of industries. Companies that sell products and services which support cannabis growers provide alternative investment options.
For example, a company like GW Pharmaceuticals uses cannabis to develop therapeutics and medicine.
Other companies sell fertilizers, soils, and accessories for cannabis growers. Yet others provide services like cash transportation, leasing of cultivation space, video surveillance, and consultancy.
All these options have different levels of investment risk.
3. You Should Invest the Right Amount
The cannabis industry is young and cannabis is still illegal under federal law. So many cannabis stocks are speculative.
Use only a small part of your capital on cannabis stock. It should not go beyond 2% of your investment capital. In fact, most of the cannabis stock on the market now are penny stocks. All the same, you should give them the same scrutiny as all the other stocks that you buy.
Buying penny stocks allows you to make huge profits if all goes well. But it also shields your investment portfolio from big losses should things go wrong.
4. Avoid Scammers
Many cannabis stocks currently trade on the Over-the-Counter Bulletin Board (OTCBB). Compared to NASDAQ or NYSE, the OTCBB has less stringent requirements for reporting and disclosing financial information. This makes it potentially a haven for scammers. Scammers can pass themselves off as legit businesses.
Before you invest, put the company under a microscope to avoid being scammed.
Some key risks in cannabis investing
Cannabis stocks suffer from “political risk”. It is vulnerable to government actions. This comes from the conflicting laws where cannabis is illegal according to federal laws but legit by state laws. Cannabis businesses that have U.S. assets are at risk of their assets being seized any time by US federal authorities.
For example, Cannabis stocks tumbled early this year when Jeff Sessions, the U.S. attorney general said that he would wage a war against cannabis use.
Currently, there are close to 300 publicly traded cannabis companies. The number is too high even for an industry projected to be worth $ 24.1 billion by 2025.
It is certain that a major shakeup is in the offing. Only a handful of the strongest players will survive — some experts give the examples of the beer, automobile, and information technologies industries and predict that in about five years a few giant companies will dominate the global cannabis business.
Some of the small companies will be taken up in mergers. But others will die a natural death. This means that some current cannabis investors will lose money.
-Highly Speculative Cannabis-Related Stocks
Some biotech companies such as GW Pharmaceuticals PLC are developing cannabinoid drugs for treating neurological and other disorders. If the drugs pass their clinical tests and are approved by the FDA, they can potentially have a huge market.
The shares of these companies have already been hyped with the hope that the drugs will be approved. It could happen either way and people will make or lose money.
The cannabis industry still has many uncertainties that can dissuade a cautious investor. But at the same time, some speculative investors have made a mint on the stock market. So you have to take a calculated risk.