According to the 2016 Marijuana Business Factbook, written by Marijuana Business Daily, if current trends of marijuana continues for the next couple years, by 2020 the cannabis industry has the potential to provide up to $44 billion yearly into the US economy. A major surge from the $17 billion seen in 2016, there’s no doubt why some of these speculations and numbers are attracting young investors to get into marijuana investments.
Despite the potential positive outcomes, the cannabis industry remains relatively small, with only a handful of businesses willing to work with the current trends of legalization. Many of these businesses are startups, and despite the tenacity of entrepreneurs, the success of these companies are not definite. Nonetheless, lots of us see the marijuana business to be on the edge of becoming a great economic force.
The Modern Day Cannabis Industry Stock Market
Despite its projection to be a massive success, marijuana investing can be trickier than investments in other industries. Again, this is because it is an industry that is just beginning. Many cannabis companies are too small to trade on a federal exchange — not only that, there is also the fact that marijuana is illegal at the federal level in the United States. As long as cannabis remain illegal, Wall Street’s regulator-in-chief won’t approve any S-1 filings from cannabis companies hoping to go public.
As a result, a lot of trading that happens in marijuana investing are over-the-counter or occur in penny stocks. These kinds of trading happen outside of federal exchanges, so regulations are a bit looser and ambiguous. However, this also means that investors have to be extra careful when choosing which marijuana stocks to invest in. Because of its rising popularity, there are many shell companies in the stock market. As well, it is hard to tell whether the information provided by a company is entirely true; just recently Medbox (now Notis Global (OTCMKTS:$NGBL)), a company that sold marijuana vending machines, was discovered to have given false information regarding its annual revenue.
An Overview of Penny Stocks
Penny stocks are securities offered by small companies — usually startups — that trade at a low price. Typically, the prices are less than $5 per share. Investors tend to view penny stocks as incredibly risky, a place where anything can happen to an investment.
True penny stocks are usually traded on listing services such as the OTC Bulletin Board (OTCBB) and Pink Sheets. It is suggested for those getting into marijuana investment to not trade on Pink Sheets, as the system is not registered with the Securities and Exchange Commission (SEC). Pink Sheets does not enforce any listing requirements either. As such, these stocks are much riskier than trading on OTCBB, as OTCBB do maintain some listing requirements and so holds a form of legitimacy.
If you’d rather have a marijuana investment that is lower-risk, then you should stick to some other low-cost stocks on exchanges like NYSE and Nasdaq. There are other marijuana stocks to invest in through companies that are more indirectly involved in the cannabis industry, like certain biotech or research pharmaceutical companies.
Be Wary of Over-the-counter (OTC) Cannabis Stocks
Though it may seem like nothing can go wrong in this promising industry, very real risks are involved if you wish to invest in public cannabis companies. Companies offer OTC stocks when they cannot meet the strict financial requirements of major stock exchanges — a telltale sign that something could be wrong. As well, OTC markets can be full of unethical stock promoters trying to gain from the loss of investors and shell companies that take money from investors without having any significant assets.
Summing up Marijuana Stocks
Overall, there will be plenty of unavoidable losses when it comes to marijuana investment in the upcoming years. The high risks associated with these stocks may be best suited for a more aggressive and experienced investor; if you are only just getting into investing or have low-risk tolerance, it might be much more beneficial for you to wait and see how the market looks in the future.
If legality is what is putting you off, consider other marijuana investment options that do not come from companies that legally grow and sell cannabis. Instead, look to other industries that help support the emergence of cannabis (like biotech, pharmaceutical, real estate, etc).
If it Looks too Good to Be True, Maybe it is
With such high risks, why is marijuana investing still so popular amongst investors? The answer lies in the volatility of the market and a potential for great rewards. Despite being known for its dramatic rises and falls, there are still optimistic investors who believe they will come out the other side successful and rich. It is rare for companies to go from being a penny stock to a power stock; investors that have invested in such companies have managed to get returns of over 1000% in a short period of time. The trick to getting such a reward is being at the right place at the right time, with the right idea of what companies to invest in.
Like any other stock, you can begin your own journey into marijuana investment by purchasing marijuana stocks to invest in through your normal stockbroker. Keep in mind that there is a reason why brokers and regulatory bodies exist — to make sure you are not blindly throwing yourself at whatever penny stock that seems to have any form of potential. This is sometimes especially true for marijuana companies: some of them put more energy in marketing their stock than focusing on their products.
What’s the Direction the Cannabis Stock Market is Taking?
Recent elections in the United States show that Americans are now much more lenient when it comes to medical marijuana. According to the National Organization for the Reform of Marijuana Laws (NORML), eight out of ten Americans support medical marijuana. As four new states (California, Massachusetts, Nevada, and Maine) join the ranks in full legalization (medical and recreational use) and four other new states (Florida, Arkansas, North Dakota, and Montana) join the ranks in legalization of medical marijuana use, some stocks on the Nasdaq are rising as much as 12%.
With this growth, interest in marijuana stocks to invest in has risen from penny stocks to Nasdaq-listed equities. Current options for investors wishing to invest in companies that are more indirect in the production of cannabis are the ones listed in Nasdaq. Some of these companies are GW Pharmaceuticals (NASDAQ:$GWPH), Insys Therapeutics (NASDAQ:$INSY), Cara Therapeutics (NASDAQ:$CARA), and Zynerba Pharmaceuticals (NASDAQ:$ZYNE).
If states continue to legalize medical marijuana and FDA-approved cannabis products (creams, shampoos, etc) gain popularity, the $2.9 billion medical marijuana industry has the potential to double in size, according to a report from Merrill Lynch. As such, investors should still be cautious in these marijuana investments.
Why Invest in Marijuana?
One of the biggest reasons to invest in marijuana is its shift towards legalization. Even listing cannabis as a Schedule II substance rather than a Schedule I substance would be a giant catalyst for marijuana stocks.
As legalization increases, the cannabis industry grows. Analysts from the ArcView Group projected that cannabis sales are expected to grow by 25% this year to $6.7 billion and that by 2020 sales can grow to be $21.8 billion. These numbers also mean a lot more new jobs as more states join the ranks of legalizing marijuana.
Besides financial and economic growth, cannabis has been projected to have great potential influence in medicine. There is currently an abundance of research going into cannabis’ use as a painkiller as well as early research regarding the role cannabis plays in the treatment for a wide variety of diseases and illnesses.
With all sorts of businesses in the marijuana industry — from technology to processing, production to research, agriculture to retail, and much more — potential investment opportunities are full of all kinds of possibilities. Despite its risks, marijuana really can be the next big industry to watch out for, and marijuana investing can really be worth the trouble.
Tips on Investing in Cannabis
As marijuana begins to gain traction and attention of investors, many companies are trying to attract investors by simply using buzzwords and disguising themselves using a red, yellow, and green flag that has a cannabis leaf, the Lion of Judah, or 4/20 printed on it. Thus, it is incredibly important for investors to be more cautious than usual when it comes to marijuana investing.
Beware of potential scams, and always be extra diligent when reviewing business models, goals, and board of directors. Keep in mind the fact that marijuana is still illegal at the federal level when you are choosing which marijuana stocks to invest in.
Before getting into an investment, get advice and feedback from qualified financial professionals; review contracts before you agree to them with credible auditors. SEC financial filings by companies often have a hidden store of insight. Some other signs to watch out for is whether or not the company has changed its name often. If the company has changed their name four times in five years, that is a giant red flag you should not ignore.
As you would any other investments, consider the future of marijuana investment and its market. For example, around 14 million Americans use cannabis on a regular basis, but this number might not grow drastically — even with legalization. The marijuana market is capped, and in the very near future has the potential to become full of competing products and services.
Always keep in mind the fact that the marijuana industry is still developing along with changing regulations and legislation. Because of this, nothing is set in stone and the market will likely continue to be unstable and unpredictable in the near future. As such, the reward can be worth it, and the excitement of a new and upcoming industry can make investment more enjoyable for some.
Featured Image: depositphotos/liorpt
