It appears that the U.S. Drug Enforcement Agency is finally getting serious about marijuana.
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.
How to Invest in Marijuana Stocks
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)
But, Really, Should I Buy Marijuana Stocks?
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?
Marijuana Legalization in the U.S.: The History and the Future
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.
More Information on Canadian Marijuana Stocks
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.
Commonly Confused Cannabis Terms
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 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.
The acquisitive Canadian company steps up its fundraising efforts, while legislation on cannabis banking inches forward and backward at the same time.
The green rush should be in full force among these half-dozen pot stocks.
These cannabis stocks are profitable. They're growing rapidly. And they're great picks to buy right now.
Almost three-quarters of all marijuana purchased in California this year will be of the illicit variety.
Why Marijuana Stocks Canopy Growth, Cronos Group, and Tilray Plunged in August but Rebounded in Early September
Investor sentiment toward the cannabis industry can shift quickly.
History may repeat itself come December.
Although not a pure play on pot, Scotts Miracle-Gro's approach to the space may give it more opportunity than a grower if this trend holds up
Three of our contributors who cover the marijuana and hemp industry detail their reasons for investing in KushCo, Village Farms, and Charlotte’s Web.
More than 450 cases of mysterious lung illnesses, along with five deaths, have been reported across 33 states.
Which stock wins in a battle between a vertically integrated cannabis company and a fast-rising cannabis producer?
The company says it is first to market with this form of medication in the state.
With Wall Street's top cannabis analyst cutting her target for the stock by 60%, what should investors do?
The new shares will be sold in conjunction with investment bank Cowen and Company.
These big-time cannabis growers offer incredible value to would-be suitors.
What you'll want to know from GW Pharmaceuticals CEO Justin Gover's comments this week at the Morgan Stanley conference.
Which stock wins in a one-on-one matchup between a top Canadian cannabis producer and an alcoholic beverage giant with a big stake in the global cannabis market?
While no longer considered the equivalent of a sell, this cannabis stock is far from a buy.
The cannabis-focused biotech couldn’t hold its post-earnings gains.
Yes, you can generate recurring income from cannabis stocks.