Marijuana Stocks

The marijuana industry is expected to triple in the next five years -- and many investors are looking to profit.

As states and entire countries decriminalize or legalize cannabis and/or its components, there are loads of opportunities for entrepreneurs and existing companies.

But as in any nascent industry, there are also loads of risks and bad actors. Whether you're a first-time investor or a seasoned veteran, it pays to understand all of the moving parts.

This guide will get you up to speed quickly.

Cannabis leaves, the raw ingredient fueling marijuana stocks. Source: Getty Images.

Follow these seven steps if you're thinking about buying cannabis stocks. The following is a summary, but we encourage you to read the entire article linked below for all the details.

1. Understand the types of marijuana products.

• There are two types of cannabis products: medical marijuana vs. recreational marijuana.
• Cannabidiol (CBD) is a cannabinoid that is different than the psychoactive delta-9 tetrahydrocannabinol (THC).

2. Know the different types of marijuana stocks.

• Marijuana growers like Canopy Growth Corporation (NYSE:CGC)
• Cannabis-focused biotechs like GW Pharmaceuticals (NASDAQ:GWPH)
• Providers of supporting products and services like Scotts Miracle-Gro (NYSE:SMG)

3. Understand the risks of investing in marijuana stocks.

• Legal and political risks
• Supply/demand imbalances
• Risk in those that are over-the-counter stocks

4. Know what to look for in a marijuana stock.

• Normal stock considerations, including:

• Management team
• Growth strategy
• Competitive position
• Financials (ideally either profitability or strong balance sheet)
• Cannabis production costs
• "All-in" cost of sales per gram
• Cash cost per gram
• For Canadian companies, the extent of international operations and distribution
• Dilution risks via warrants and convertible securities

5. Evaluate the top marijuana stocks and exchange-traded funds (ETFs).

• Marijuana growers like Canopy Growth, Aurora Cannabis (NYSE:ACB), Tilray(NASDAQ:TLRY), and Aphria (NYSE:APHA)
• Biotechs like GW Pharmaceuticals, Cara Therapeutics (NASDAQ:CARA), and Insys Therapeutics (NASDAQ:INSY)
• Ancillary providers like Scotts Miracle-Gro
• ETFs like Horizons Marijuana Life Sciences ETF (NASDAQOTH:HMLSF) and ETFMG Alternative Harvest ETF (NYSEMKT:MJ)

6. Invest carefully.

• For many, avoiding individual investments in the marijuana space entirely is the right call.
• For those who buy in, keeping your marijuana exposure to a small percentage of your overall portfolio limits your risk.
• Pure plays are riskier than more diversified plays.

7. Monitor changing industry dynamics closely.

• Laws, regulations, competitive forces, and the business strategies of the companies themselves will all change rapidly over time.

Read more: How to Invest in Marijuana Stocks (Note: includes a list of every major marijuana stock)

We just went step-by-step through how to invest in cannabis, but just because there's a trendy new sector with lots of press and potential growth doesn't mean you need to put your hard-earned money in it. After all, if you buy broad index funds, you're covered no matter what sector of the stock market does well.

Think through the pros and cons as you read on: Should You Invest in Marijuana Stocks?

One of the biggest variables in cannabis investing is to what extent marijuana will be decriminalized or legalized within the United States, both on a state-by-state basis and on a federal basis.

The link below provides a quick spin through what we've seen so far, from decriminalization efforts starting in 1973 to legalization efforts beginning in earnest in 1996 to the political signs of where we seem to be heading.

Read on: Timeline for Marijuana Legalization in the United States: How the Dominoes Are Falling

There's been tremendous interest in Canadian cannabis stocks, because on October 17, 2018, recreational use of marijuana became legal in Canada (it had been legalized on a medical basis since 2001).

Beyond consumption by Canadians, the upside thesis involves operations or distribution to other countries that have legalized or may legalize marijuana to various extents. This includes Germany and particularly the large market on Canada's southern border.

Read on: Everything You Need to Know About Investing in Canadian Marijuana Stocks

One of the difficulties in understanding the marijuana industry is the jargon. Fortunately, it's not too complicated once you get a handle on a few main terms.

Marijuana vs. cannabis

Cannabis is the scientific name of the plant (the genus that houses three species). For an investor's purposes, marijuana is synonymous with cannabis, as are more informal nicknames like pot, weed, ganja, dope, grass, 420, sticky icky, etc.

CBD vs. THC

Cannabis is made up of nearly 500 chemical constituents, including many dozens of cannabinoids (substances that act on the body's cannabinoid receptors).

The two most commercially relevant of these cannabinoids are delta-9 tetrahydrocannabinol (THC) and cannabidiol (CBD). Only THC is psychoactive (i.e., makes you high).

Hemp

Hemp is a strain of a species of cannabis with relatively low levels of THC and relatively high levels of CBD. It has many industrial uses like providing fibers to make rope and clothing.