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A Guide To Investing In Cannabis Stocks: Should You Invest?

The popularity of cannabis stocks has boomed in recent years, yet there is a lot to consider before investing. This guide will help you to understand what cannabis stocks are, the risks involved, and how to invest.

Posted: 23rd August 2021 by Finance Monthly
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In recent years, several countries and states have legalised the use of cannabis for medical and recreational purposes. In 2013, Uruguay became the first country in the world to legalise cannabis for recreational use, with Canada following suit in 2018. In the US, Marijuana remains illegal as a recreational drug at federal level, but numerous states, including Washington, California, Colorado, and Nevada, have now moved to legalise it within their borders. In the UK, the medical use of cannabis was legalised in November 2018, after the cases of two epileptic children, who benefited substantially from using cannabis, drew increased public attention to the matter. 

By 2030, the cannabis industry is set to be worth $100 billion in the United States alone, a forecast that certainly makes cannabis an investment worth considering. In the most recent quarter, Jushi Holdings Inc (JUSH.CX) which is a multi-state company focused on building a portfolio of branded cannabis and hemp-based assets was the marijuana stock with the highest year-over-year (YOY) sales growth, with revenue growth of 355.4%

There are three key ways in which cannabis investment can be done: through directly investing in marijuana shares, spread betting, or CFD trading. However, it is important to note that both spread betting and CFD trading carry much higher risks. For those who are new to trading, it is wise to stick to investing in cannabis shares directly. 

What Are Cannabis Stocks?

Cannabis stocks (or marijuana stocks) are the shares of companies that are either involved in the growing of cannabis, involved in the pharmaceutical or biotech developments of medical cannabis, or are suppliers of cannabis products and services.  

There are two main types of cannabis products: recreational or medical, with the vast majority of companies being involved in the latter. In recent years, there has been a lot of evidence to suggest that cannabis products have positive effects on people suffering from a wide variety of medical conditions. Preliminary research suggests that cannabis can help to reduce chronic pain and muscle spasms, can alleviate nausea during chemotherapy, can improve appetite in people suffering from HIV/AIDS, and can even treat severe forms of epilepsy, as seen in the UK. 

Understanding The Risks Of Investing In Cannabis Stocks 

As with investing in any type of asset, it’s important to understand that there is always some degree of risk involved. Before investing in cannabis stocks, there are some specific risks you should weigh up:

  • Political Risks: Although it is legal to trade and invest in publicly listed shares of respected companies that operate within the cannabis industry, some countries, such as the US at federal level, place heavy restrictions on banks that deal with cannabis-related businesses. Consequently, it can be very difficult for affected cannabis businesses to access vital financial services, potentially jeopardising their chances of long-term survival.
  • Cash Flow Issues: Many cannabis industry participants are growing companies that yield small profits and frequently face the risk of running out of cash. These businesses often raise capital by issuing new shares, decreasing the value of existing shares. 
  • Imbalances With Supply And Demand: As a rapidly expanding sector within the agriculture sector, cannabis is especially vulnerable to irregularities in supply and demand. Following the legalisation of cannabis in Canada in 2018, Canadian cannabis growers undertook huge expansion initiatives to up their production capacity to meet demands. However, many Canadian growers have now scaled back their production as cannabis supply in the country is now outrunning demand. This has seen prices fall and revenues suffer.

How To Invest In Cannabis Stocks

There are numerous companies providing services to the cannabis industry, meaning investors have a wide choice of stocks or ETFs. 

  • Step 1: Research the company

Research is an essential part of making any investment. You should check out the latest news surrounding a given company, gain a feel for the market sentiment on platforms such as Stocktwits, and check SEC filings and other documents required by diverse regulatory agencies. 

  • Step 2: Decide how much you want to invest

Stocks are volatile and the future is unpredictable. As a rule of thumb, you should never invest more than what you can afford to lose. Although thorough research often leads to strong returns, there’s no guarantee that this will always be the case. 

  • Step 3: Determine your timeline

When you buy and sell can make a big difference, so it’s important to consider your timing carefully. However, you should note that it can be very difficult to time the market correctly. An investment strategy that may be worth considering is dollar-cost averaging (DCA). This is a strategy in which an investor divides the total amount that they wish to invest across periodic purchases of a target asset. DCA can help to limit the impact of volatility on the overall purchase. 

  • Step 4: Choose your broker

A broker serves as an intermediary between an investor and a securities exchange.  Choosing your broker isn’t dissimilar to picking a stock, it starts with understanding your investing style and determining your investment goals for the short and long term. Apps like Freetrade and IG are great places to start.   

  • Step 5: Buying your stock

For beginners especially, the process of actually buying stock can be trickier than it initially sounds. There are generally 2 types of ‘buy’ orders: market order and a limit order. A market order will execute the purchase at the present market price, while a limit order will only execute if the price falls at or below the limit price,” Benzinga’s Thomas Rudy explains. “Although a limit price might give an investor a lower price of entry, there is no guarantee that the limit order will execute.”

Are Cannabis ETFs A Sensible Option?

Another way to invest in cannabis stocks is through cannabis ETFs (Exchange Traded Funds). ETFs are similar to mutual funds but there are a few key differences. As with mutual funds, ETFs invest in a diverse range of securities and offer automatic diversification to shareholders. Instead of buying shares of an individual stock, investors buy shares in the ETF. They are entitled to a corresponding portion of its overall value. One key difference between ETFs and mutual bonds, however, is that ETFs are traded on the open market, meaning ETF shareholders can buy and sell shares of an ETF whenever they choose. 

ETFs are popular investments because they can be bought and sold easily and because they are generally inexpensive. ETFs also involve fewer fees than other types of investments and are more tax-efficient than mutual funds. Although there is some degree of risk with any investment, ETFs can be very safe investments provided you do sufficient research first. 

As cultural tolerance of cannabis increases across the globe, a plethora of opportunities open for companies and investors alike. However, as with any investment, it is important to do your research carefully and weigh up whether or not it's a sensible addition, or start, to your portfolio.

This article does not constitute financial advice. The author and Universal Media Ltd. are not qualified financial advisers. All investments are made at the reader’s own risk.

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