Almost ten years ago, Colorado and Washington became the first two states to legalize recreational marijuana. In that time, the cannabis industry has exploded throughout the United States and worldwide. Legal marijuana sales are expected to reach $22 billion nationwide by next year, and globally sales are forecasted to reach nearly $73.6 billion. While many investors may be eyeing the sector as a promising place for their funds, there remain some key points to know before diving in. Below are 5 things to know before investing in the cannabis industry.
Public or Private
Before diving in you need to decide if you are going to invest in publicly listed marijuana companies or private companies. There are two big advantages of investing in public companies: (i) greater information available on which to base a decision, and (ii) the ability to freely buy and sell.
Know What You Want To Invest In
When investing in stocks and in the cannabis industry, there are three distinct categories which should be focused on. Gaining an understanding of these is critical in identifying which is of the most interest for your investment before beginning.
- Marijuana Growers and Retailers
- This sector is for those interested in investing in businesses actually growing marijuana and selling products. There are many different types of products and business sizes, and investors should know before adding to their portfolio which segments of the market they’re most bullish on.
- Ancillary Products and Service Providers
- Investors intrigued by cannabis growers may consider investing in the ancillary product sector of the market. This includes packaging and labeling, growing and consumption products, software and technology, security and a host of other services and products that help maintain the growth of the industry.
- Biotechnology Companies
- The third option for marijuana stocks lies within the biotechnology space of the industry. Businesses in this sector tend to be focused on work and research such as lab-created cannabinoids and marijuana, as well as new medicines and treatments derived from the products.
The marijuana industry is still a particularly nascent portion of the market, and with that comes increased volatility in comparison to other stocks investors may be more accustomed to dealing with. New regulations in states attempting to legalize marijuana both recreationally and medically, the possibility of increased taxes on the market and an explosion of new companies looking to enter the market will continue this volatile nature of cannabis-related stock prices. When investing, make sure to acknowledge the potential risks in the short-term as the industry standardizes practices and other regulations in the future.
Do Your Research
Along with the expected volatility of the market, investors should be sure to research the financial and management teams behind the cannabis businesses of interest. This research includes ensuring that the company: holds valid licenses at the city and state level, if applicable, is following state regulations — such as the inability to sell across state lines — and that there is sustainability and consistency built into the business plan. With a plethora of companies joining the market so quickly, complicated regulations and high taxes there is a greater opportunity than usual to see businesses fall to the wayside after initial peaks of investment.
Consider Starting Small
Due to investors’ wariness of placing large amounts of funds into a single cannabis business or even multiple, one potential strategy is to start small. By determining the ins and outs of the industry without adding undue risk to your portfolio of investments, those intrigued by this new market can still be involved. Criteria for investing could change dramatically on a monthly basis, and having smaller investments that can be expanded quickly or sold easily can help combat the sector’s expected volatility.
Invest in a Cannabis ETF Instead
For those concerned about investing in a single cannabis-company, an exchange-traded fund (ETF) can be a reliable alternative. One notable example is the ETFMG Alternative Harvest ETF, which holds shares in around 32 companies. This gives investors a much better sense of where the cannabis industry is heading and allows for risk to be spread out much more evenly among stocks. This also allows investors time to conduct proper research and ascertain which stocks they’re most likely to continue to invest in and promote within their own portfolios.
The marijuana industry is a rapidly growing industry which is set to see more legalizations on the national level. With a carefully designed investor plan that incorporates the acknowledged risks of this volatile market, those interested in the industry can do well with the right strategy. Make sure to understand what segment of the market you plan to invest in, and which products, growers or businesses appeal to your investor portfolio the most. Additionally, consider ETFs to diversify your risk, or consider starting small and figuring out where in the market your money is best suited.