Marijuana legalization has made the marijuana industry incredibly alluring to investors. The marijuana market is expected to surge to $21 billion by 2020, and that's got many people wondering which marijuana stocks could benefit most.
While the marijuana market is undeniably growing quickly, and that's good news for marijuana stocks, most investors don't have enough information about the pros and cons associated with marijuana companies to make the best money-making decisions. Do you have the knowledge necessary to profit from marijuana's explosive growth opportunity?
Try passing this marijuana quiz
To find out if you're armed with enough information about marijuana to make smart investing choices, see if you can pass this marijuana stocks quiz I've prepared. The 10-question quiz is set up in "true" or "false" fashion, and although some questions are tougher than others, all of them could help you profit from marijuana investing.
So, grab a piece of paper and pen, read through these questions, and jot down your True or False answer. At the end, you can see how you did.
1. Marijuana is legal everywhere in the United States.
2. Marijuana can only be bought legally from licensed dispensaries.
3. Recreational marijuana has only become legal in the past five years.
4. If you buy a marijuana stock, your profit is determined by the price of marijuana.
5. All marijuana stocks trade on the same stock exchange.
6. All marijuana companies are vetted by the Securities and Exchange Commission (SEC).
7. Every marijuana company is making money.
8. Medical marijuana sold at dispensaries is approved by the Food and Drug Administration (FDA).
9. Recreational marijuana companies do business like any other company.
10. Marijuana stocks are guaranteed to succeed.
Did you pass?
Have your answers written down? Let's see how you did.
1. Marijuana is legal everywhere in the United States. False.
You can buy medical marijuana legally in 28 states, and you can buy recreational marijuana legally in eight states. Marijuana has not been legalized by Congress, and given that Republicans won Washington, D.C., in November, it seems unlikely that's going to change anytime soon.
2. Marijuana can only be bought legally from licensed dispensaries. True.
In states that have passed laws legalizing marijuana, marijuana must be purchased at state-licensed dispensaries. Licensing requirements vary state by state, and marijuana taxes and licensing fees are collected by state governments. Thus, the marijuana market is highly regulated.
3. Recreational marijuana has only become legal in the past five years. True.
While California blazed the legalization trail when it passed pro-medical-marijuana laws in 1996, legal recreational marijuana is a much newer win by pro-pot advocates. In 2012, Colorado and Washington became the first two states to legalize recreational marijuana for adults age 21 or older. Since then, recreational marijuana has become legal in Alaska, California, Massachusetts, Maine, Nevada, and Oregon.
4. If you buy a marijuana stock, your profit is determined by the price of marijuana. False.
While fluctuating marijuana prices will impact how much revenue is collected by marijuana companies, stock prices can move higher or lower for any reason, regardless of marijuana prices. This means that at any point in time, investors can lose money in marijuana stocks, even if marijuana's underlying price is rising.
5. All marijuana stocks trade on the same stock exchange. False.
There are multiple exchanges upon which marijuana stocks trade, and many marijuana stocks trade on the over-the-counter market, or pink sheets, rather than on the more commonly known Nasdaq exchange or New York Stock Exchange. Also, some popular marijuana stocks trade primarily on foreign stock exchanges, but also have tracking stocks called American depositary receipts, or ADRs, that trade in America.
6. All marijuana companies are vetted by the Securities and Exchange Commission (SEC). False.
Marijuana stocks that trade over the counter do not need to conform to the strict regulatory filing requirements imposed on stocks that trade on the Nasdaq exchange or New York Stock Exchange. Although stocks that trade on major U.S. exchanges must file documents with the Securities and Exchange Commission, the SEC does not guarantee that the information provided to it in these documents is correct.
7. Every marijuana company is making money. False.
While some marijuana companies are turning a profit, many marijuana companies are investing heavily in their businesses, and as a result, continue to lose money. For example, Aphria Inc. (OTC:APHQF), a Canadian producer and marketer of medical marijuana, reported a net profit of $1 million over the past 12 months, but medical-marijuana drug developer GW Pharmaceuticals plc (NASDAQ:GWPH) reported a loss of $82.2 million last fiscal year.
8. Medical marijuana sold at dispensaries is FDA-approved. False.
The Food and Drug Administration has not approved cannabis sold at dispensaries for medical use; however, it has approved marijuana-derived drugs that are made by drug companies and that have passed rigorous scientifically controlled trials. For instance, the anti-nausea and anti-HIV drug Marinol is derived from THC (tetrahydrocannabinol), a psychoactive chemical in marijuana, and it's been on the market since the 1980s.
9. Recreational marijuana companies do business like any other company. False.
While there are other highly regulated industries in the United States, American marijuana companies do face some unique challenges. For instance, because marijuana has not been legalized at the federal level, marijuana companies' access to traditional banking services can be more limited than it is for other companies. Further, while the Justice Department has allowed marijuana companies to operate within states that have legalized marijuana, that could change in the future.
10. Marijuana stocks are guaranteed to succeed. False.
The marijuana market is relatively new and it's evolving rapidly. There are bound to be winners and losers as the market matures. Marijuana companies with deep pockets stand the best chance of success; however, there's significant risk associated with buying marijuana stocks, and that makes them unsuitable for most investors.
If you got the answers to at least seven out of 10 questions correct, great! But keep in mind that getting even one of these questions wrong could mean that you've got some more homework to do before buying into cannabis companies.