Investing in the stock market can help people grow their wealth over time. Investors can take different approaches to investing. Some choose to be hands-off and let a professional handle their stocks. Others are more involved, overseeing how their stocks perform and directing action on selling or purchasing new stocks.
No matter how you handle your stocks, diversifying your investments can be good for business and your bottom line.
With the legalization of marijuana in Canada just a few short years ago, cannabis stock has been a hot topic. Should people invest in them? Will they perform well? For those who are new to investing, how do you even get started investing in cannabis stocks?
The stock market is hard to predict, making the answers to some of these questions difficult. By doing your research, you can feel confident in your decision to invest in marijuana or to hold off and wait for the market to mature a little.
Why People Are Investing in Weed
You’ve likely heard a story of someone investing in a new stock early and that stock paying off in a big way down the road when the company or product takes off. Or, someone selling a new stock that then pays out big down the road, causing the original seller to miss out on some substantial earnings. These stories can play a part in inspiring investors to purchase new stocks, such as marijuana.
The desire to get into a new market early and make a large profit is one of the most common reasons people invest in marijuana stocks. Investors hope they can buy stock while the price is low and wait for the stock to go up before selling it at a higher price and making a good profit.
Although the market is relatively new and has had its ups and downs, analysts predict the market to rebound. Plus, they expect it to grow as more countries begin to legalize marijuana both for medicinal and recreational purposes, making investing in marijuana early appealing to some investors.
Investors may also want to invest in cannabis not because they are necessarily passionate about the right to smoke weed but think of cannabis stocks as a way to invest in the future. The scientific and medical communities are continuing to study the cannabis plant and its effects on people in hopes of developing new treatments and medications. By buying stocks in this area, people may feel they are making a difference.
Other investors may just be looking for a unique investment opportunity or a way to diversify their portfolio, and investing in weed fits the bill.
Different Types of Marijuana Stocks
For those considering adding marijuana stocks to their investment portfolio, it is important to understand that there are different types of marijuana stocks. If you are choosing to invest in weed for a specific reason, knowing the type of stock you are purchasing is important.
Three of the most common cannabis stocks you will find on the market right now are:
- Growers and retailers. This group encompasses companies that cultivate and grow cannabis plants. Their crops can be grown inside or outdoors and are harvested and sold to customers afterward. These companies may sell to online retail stores or even medical marijuana sellers.
- Cannabis-focused biotechs. For those interested in investing in cannabis to support continuing research for its medical uses, this is likely the type of stock you want to look for. This group includes companies that work to develop cannabinoid drugs for pharmaceutical use.
- Ancillary product and service providers. This type of stock does not involve investing in companies that necessarily grow or distribute cannabis. Instead, these companies produce products and services that cannabis companies use. For example, they may make the lights a cannabis company uses to grow their plants indoors, or they may make the packaging a company uses to ship its products to customers.
By knowing the type of cannabis stock you are investing in, you can make sure the stock meets your values, goals, and reason for investing in the cannabis market.
What to Look for When Choosing Marijuana Stock
Finding out the type of marijuana stock you want to invest in, while important, is but just one factor to take into consideration before you buy cannabis stock. Making a sound investment is important, especially for those who can’t afford to lose a lot. Additional research can help investors know what they are getting into when purchasing a specific stock.
When choosing the best marijuana stock for you, be sure to:
- Review the company’s financials. Check to see if the company has turned a profit and their projections for the coming year. Although very few marijuana companies are turning a profit quite yet, this can give you an idea of what to expect in the years to come if you are playing the long game with this stock choice. This information can usually be found on the company’s website.
- Review the company’s leadership team. This is important on multiple levels, and you can glean a lot of important information by seeing who is running the company. For example, does the person running the cannabis-focused biotech have experience in pharmaceuticals? If so, that’s a good indicator that the person running the company knows how to grow the business. You should also look to see how many shares management owns and if they have recently sold any. If people at the top have recently sold a bunch of shares, that can be a red flag for investors.
- Look at the company’s growth strategy. Marijuana is a growing market. Industry players are not only expanding into other parts of the world, but they are also developing new products to put on the market. See if the company you are planning to invest in has plans in place to expand into other countries and/or other markets.
Keep in mind; this is not a complete list of things to look for when choosing a cannabis company stock. But instead, the list is a few suggestions of what to look for. Be sure to do your own research and consult a professional to ensure the company you are considering investing in meets your criteria.
3 Cannabis Stocks to Consider
Although there are more cannabis stock options available, the three below may be a good starting place right now. They are on-track (so far) to generate a full-year profit in fiscal 2021, something most cannabis companies are not due to their age.
- OrganiGram Holdings. OrganiGram has only one cultivation farm and processing site, a benefit for them in many ways. Chiefly, having one operational facility allows them to adjust their operating costs to match market conditions. Should the market drop, they can scale back their costs to protect their profit. OrganiGram Holdings also has invested in the growing and typically more profitable derivative cannabis market, which includes products such as chocolate edibles and the marijuana beverage game.
- Aphria. Like OrganiGram Holdings, Aphria is on track to record a profit in the fiscal year 2021 and have a hefty cash stash, meaning they are able to sustain themselves long-term. Aphria is also a pharmaceutical drug distributor in Germany, which helps drive some of their sales and profits.
- Valens. Valens is heavily invested in marijuana derivatives such as edibles and topicals. This marijuana sector often offers better profit margins than just investing in a traditional cannabis flower. Valens has also recently moved into white-label infused-beverage production, showing their plans to grow. Weed drinks are a growing trend in the industry, putting Valens at the forefront.
The Risks and Benefits of Investing in Marijuana
Just like with any stock, there are risks and benefits involved in investing in marijuana stocks. It is important to weigh both the pros and cons before buying either the stock listed above or any stock you may be interested in.
Risks of investing in marijuana include:
- The newness of the industry. While cannabis has been around a long time, it has only recently been legalized in Canada and other areas of the world. That means most companies do not have a long history in the business. This youthfulness can mean companies are more likely to fail, and it means that they have less information available for you to look at when deciding if the investment is worth the risk.
- The market is volatile. Although the marijuana market is expected to grow, the stock market when it comes to marijuana is full of ups and downs. For new investors and those who can’t afford a very large loss, this can make investing in weed risky.
- It is a commodity. Marijuana is, in essence, a crop. That means the value of the cannabis itself, in general, can go up and down from one year to the next. If you choose to invest in cannabis growers and resellers, your profits may be impacted by factors such as too little demand or whether or not there was a good harvest that year.
Marijuana stocks can offer benefits as well. Cannabis stocks:
- Offer investors the chance to invest in a growing industry. If playing the long-game is a goal for your investing, marijuana may be a good bet. Since the industry is relatively new, investors have the opportunity to get in early while stock prices are relatively low. Should the market continue to grow and start performing well consistently, this can pay off for investors in the long-run.
- Help you diversify your portfolio. Since there are different types of marijuana stocks (growers versus cannabis-biotech groups), investing in cannabis can help you diversify your portfolio into other industries, not just cannabis.
As always, be sure to weigh the pros and cons of any stock before you buy and do your research so you can make an informed decision. Consult with your financial advisor with questions or before making any significant changes to your portfolio.
How to Get Involved in the Stock Market
Whether you are a young person looking to invest and grow your wealth or an older adult ready to step up your earnings, people are continually looking at ways to invest in stocks.
But, how do you get started? There are three things you’ll need to start your investing journey:
- A broker to help make the trades and advise you
- Money to invest and purchase stocks
- An idea of the type of stocks you’d like to invest in and the type of strategy you want to take (minimal risk or high risk).
Once you find a stockbroker you want to work with, make an appointment. Ask about their cost for their services beforehand, so you are prepared.
Keep in mind that although it is possible to invest in the stock market on your own, it can be a lot of work, especially for someone just starting out. Having a stockbroker or a financial advisor (or both) can help you get the most out of your investments and make the best decisions.
The Future of the Marijuana Market
The marijuana market is somewhat known for its uncertainty, but that does not mean cannabis is not a good investment. New Frontier Data projects the Canadian cannabis market to reach $9.2 billion by 2025 — just four years from now.
Marijuana stock may not be the best option for everyone, but for those who are able or want to play the long-game with cannabis stocks, the payoff could be worth it. Consider investing small to start and increasing your investment as the stock grows if you are unsure if cannabis stock is right for you.
As always, it is a good idea to discuss your investment strategy with your broker and/or financial advisor. They can help you weigh the pros and cons of the different investment opportunities, protect your money, and give you peace of mind in your stock decisions.