How Do You Invest in Cannabis Stocks?

by | Aug 24, 2021

Discover why investors seeking an environmental and socially responsible investment in an emerging market find the cannabis sector increasingly attractive.

For curious investors looking to diversify their portfolios, the question becomes: “How do I get into marijuana stocks?”

Before we answer this question, we should discuss the use of the word ‘marijuana’ vs. ‘cannabis’:

  • Cannabis is the scientific name for the plant, derived from the genus Cannabis, which consists of two main species – Cannabis sativa and Cannabis indica
  • Marijuana is commonly used in the medical, legal, and cannabis reform communities. The word marijuana has fallen out of favor due to its past use as a derogatory and discriminatory word[1]
  • The preferred scientific name of the plant is cannabis. However, many states in the U.S. still use the phrase medical marijuana. So we may use marijuana in some cases.

If you are interested in investing in cannabis penny stocks, cannabis startups, or in states with a medical cannabis (marijuana) market, the industry is teeing up plenty of answers.

Cannabis: An Industry on the Rise

For those socially responsible investors interested in moving portfolio positions away from coal, oil, gas, or other environmentally damaging industries, the question is this:

Where do I put my investment?

Emerging markets with redeemable qualities – like the cannabis sector – naturally become attractive.

To say that the cannabis industry is growing at a rapid pace would be an understatement.

  • In 2020, global cannabis sales reached nearly $21.3 billion, an increase of 48% over 2019 sales of $14.4 billion.
  • The market is projected to reach USD $90.4 billion by 2026, according to GlobeNewswire[2].

In 2020, New Jersey, Montana, South Dakota, and Arizona approved adult-use legalization, and voters in Mississippi approved medical cannabis.

Then in 2021, New York, Virginia, and New Mexico legislatures legalized cannabis, while in Washington D.C., the Senate has shown signs of supporting a new federal legalization measure.

So it’s no surprise that investing in the marijuana industry has experienced a marked increase. Many compared this increase to the “gold rush” of the late 1840s and labeled this modern-day surge the “green rush.”

As cannabis becomes more legalized across the globe, market caps and entrepreneurial spirits are growing just the same.

Corporate ventures, small businesses, and investors have rushed to capitalize on this new legal commodity. But like any rapidly scaling industry, there will be a learning curve to manage.

How to Begin Investing in the Marijuana Industry

As with any investment, wise investors diversify.

Once you decide to allocate a portion of your investment portfolio into the legal cannabis industry, first determine how you’ll diversify your investment within the sector.

Step 1: Diversify Among Investment Vehicles

Often investors will seek out publicly traded stocks, but there are several options available to investors seeking to test the waters of the cannabis market.

investing in the marijuana industry stocks

Publicly Traded Stocks

Cannabis stocks are traded on public and over-the-counter markets. They can be found on:

  • The New York Stock Exchange (NYSE)
  • The Canadian Stock Exchange (CSE)
  • OTC Markets

Remember, just because a stock is listed doesn’t mean it’s a sound investment.

Sure, a few larger cannabis players and even some smaller players in the penny stock range garner a lot of media attention. But currently, there are no blue-chip marijuana stocks.

Many investors are wondering how to look up cannabis penny stocks on large platforms like Fidelity or E-trade.

These brokerages have apps. And those apps enable even novice investors to buy speculatively and turn a quick profit.

That’s certainly one way of investing in cannabis.

But buyers should be careful.

Why?

Just like there’s a lot of money to be made with speculation, a lot of money can be lost that way too.

Investors who have experience with day trading might find success. Those who follow the news very closely all day also might find success. But “might” is the keyword here.

There is quite a bit of downside potential because:

  • When investors want to make a move into cannabis, stocks get a lot of press. Even social media press.
  • Some companies push out a good amount of exciting PR “stories” that cause a stir.
  • But these stocks are more penny stocks than they are cannabis stocks. And penny stocks tend to expose investors to pump-and-dump schemes.
  • Volatility, especially in the cannabis stock space, can feel exciting. Often, the market is being manipulated, and large swings in cannabis stocks are all too common.

Another interesting and emerging trend to consider is private equity fund cannabis investing.

What Seasoned Investors Do
Seasoned investors keep cannabis (marijuana) penny stocks and even more well-known stocks to a minimum. Instead, they lean toward private (non-public) cannabis stock offerings and equity funds.

Privately Held Companies

Some of the best cannabis companies are privately held and not publicly traded.

For growing companies, being privately held often means pleasing a smaller group of stakeholders and clientele. This leads to fewer creative restrictions. It also means fewer investment restrictions from regulators like the SEC.

Investment banks and hedge funds have easy access to privately-held cannabis investing opportunities deals. Plus, private placements are less regulated than public investment. That means they can have higher risks. As a result, they are generally geared toward more sophisticated investors.

As such, privately-held cannabis investment opportunities can be harder to come by for a private investor.

Crowdfunding and exempt private stock offerings are becoming popular. Crowdfunding cannabis often focuses on ancillary businesses, which can have very attractive risk profiles.

On the other hand, private stock offerings are harder to find because you generally have to know someone sponsoring the deal.

Fortunately, recent legislation has widened the availability of Regulation D and Regulation A+ offerings:

  • In 2012, the Jobs Act made it easier for companies to access investor capital[3]. This enabled early-stage private companies to raise money from everyday non-accredited Investors.
  • Structured almost like a mini IPO, Regulation D and Regulation A+ offerings are exempt from many of the registration requirements mandated by the Securities Exchange Act of 1934.
  • Companies undergoing a Reg A+ offering can raise capital from accredited and non-accredited investors with smaller fees than a traditional IPO[3].

Reg D & Reg A offerings provide private investors with opportunities to get in on the ground floor of emerging cannabis companies.

Most cannabis companies begin as privately held companies. Investors who choose this route are often paid through distributions. Those investors may receive such distributions over the life of that investment.

What Seasoned Investors Do
Seasoned investors seek out organizations that help interested investors make the right connections and “know” the right people in the industry. This way, investors can be alerted to open offerings where the investment profile meets the investor’s unique investing goals.

Equity Funds

Cannabis equity funds, whether mutual funds or exchange-traded funds (ETFs) buy ownership in a portfolio of cannabis businesses.

Cannabis ETFs provide the opportunity to invest in companies that operate in every vertical of the cannabis industry. ETFs can help diversify a well-rounded cannabis portfolio. But there are several downsides.

  • Limited potential. Generally invested only in publicly traded companies, ETFs tend to limit the upside for investors because the founders and investment banks have already gotten the lion’s share of upside with the initial public offering (IPO).
  • Lack of ground floor opportunity benefits. Although cannabis ETFs can offer a broad range of companies to invest in, they generally lack the upside potential that a ground-floor opportunity can unlock for a private investor.

What Seasoned Investors Do
Seasoned private investors seek out private cannabis placements in a pre-IPO startup. In this case, the investor now has a ground-floor opportunity that could result in a much more tremendous upside than an ETF.

Cannabis REITs

Cannabis companies are constantly seeking capital and new ways to raise funds.

Cannabis real estate investment trusts (REITs) help cannabis companies raise funds by entering into a sale-leaseback transaction with a cannabis REIT.

Since cannabis is an emerging industry, only a limited number of REITs exist in the cannabis sector. As the industry grows and legalization expands geographically, expect to see more and more cannabis REITs.

Cannabis REIT transactions are providing high yields on invested capital. As more states legalize cannabis and the industry grows, new businesses will need funding and require real estate for their operations.

finding the best marijuana stocks online

Step 2. Understand the Industry to Find the Best Marijuana Stocks

To find the best marijuana stocks, it’s important to understand the different players in the industry.

Producers, Processors & Retailers

Three primary types of cannabis organizations include:

  • Producers represent a significant portion of the total number of cannabis businesses in the industry. After all, no farmers, no food. And no farmers, no cannabis. These organizations grow, cultivate, and harvest cannabis crops.
  • Processors process and package cannabis flowers and manufacture the trim byproducts into various concentrates.

Most publicly traded growers and processors in the U.S. have tiny market caps. Those caps are much higher for Canadian growers.

  • Retailers handle the next stage in the go-to-market process by distributing the end products from the growers to customers. In some states, such as California, there is another class of licensee called a Distributor who acts as a middle man between the producers, processors, and retailers. Other companies operate legalized retail stores or dispensaries.

For investments in growers, processors, and retailers, the significant potential is being driven by continued global legalization.

Cannabis-focused Biotechs

These are biotechs that develop cannabinoid drugs.

With legalization, investors are racing to stake their claim with innovative people and companies:

  • Entrepreneurs – Early in the race, entrepreneurs in Denver were building so many greenhouses that the city saw a marked increase in energy consumption.
  • Engineers – As the industry becomes more energy-efficient over time, genetic engineers have learned how to make cannabis in microorganisms.
  • Scientists – Scientific advances continue to create new strategies to treat and prevent diseases. Cannabis-focused biotechs are developing drugs using specific elements of cannabis called cannabinoids. Whether organic or synthetic, they are categorized as cannabis stocks.

Providers of Ancillary Products & Services

Don’t forget about the companies that don’t touch the actual flower of the cannabis plant.

As supply increases, the price per pound of cannabis declines. This is concerning for growers and retailers, so naturally, the focus turns to drive efficiency for cost savings purposes.

Why? Because the focus on efficiency can cut production costs per pound significantly for growers.

Ancillary cannabis companies help with the efficiency so many companies are seeking. By definition, ancillary cannabis companies are those with products and services that do not touch the plant.

From agricultural tech to the point of sale, these companies represent a wide-ranging vertical and include products and services like:

  • Cannabis tech
  • Hydroponics and lighting systems
  • Packaging, marketing, and management services

GET THE FACTS

CANNABIS INVESTING

Learn the science-based facts before investing in the cannabis industry. So you don't get burned! Download the free guide.

Step 3: Get a Handle on Risks vs. Rewards

Risk and reward are inextricably related. The cannabis market, like any emerging market, is rich in both risk and reward.

A Diligent Risk Analysis

No matter which combination of options you choose, due diligence is essential when considering any emerging market, legal cannabis included.

Cannabis stocks have their own unique set of risk factors that are important to understand:

  • Cash flow. First, like any emerging company, new cannabis companies struggle to generate profits and raise capital. To raise capital, the companies issue new shares, which dilutes the value of existing shares. Even after issuing new shares, cash flow problems can still hinder growth for new companies.
  • Speculation. Cannabis stocks are pretty speculative. Like any other stock, their success is primarily driven by the underlying business model. But for cannabis, sometimes the fundamentals can be less important than market activity in the sector.
  • Hype. Hyped-up press releases can result in pump-and-dump schemes. And this can significantly impact stock price.

The Benefits of the Emerging Cannabis Private Market

This new wave of emerging cannabis companies is revolutionizing medical marijuana investments with an impressively sustainable vision.

Getting in early on the ground floor of any emerging market has its potential benefits:

  • Upside potential. The emerging nature of the market serves to be a ground-floor opportunity that could result in a significant upside.
  • Medicinal benefits. Medical marijuana will be a significant force in the future of medicine, pain management, and providing an alternative to alcoholic beverages.
  • Social responsibility. Plus, many investors like the social responsibility that so many new cannabis companies embrace.

Step 4: Understanding Medical vs. Recreational Marijuana Investing

An investment in medical marijuana will differ significantly from an investment in recreational marijuana. (See article Medical vs. Recreational Marijuana) So understanding the difference between the two will be very important.

Among other things, you’ll want to investigate the top medical marijuana companies and top recreational marijuana stocks.

Then there is the issue of federal legality.

Cannabis and medical marijuana are not yet federally legal in the United States. As a result, the New York stock exchange and other United States-based exchanges do not allow cannabis stocks to be traded in locations where that activity is federally illegal.

So now there are these strange situations:

  • U.S. companies are executing reverse mergers or going public on the Canadian stock market.
  • And Canadian companies (that would be illegal in Canada) are going public in the US market.

These are just some of the quirks of cannabis investing.

These quirks can lead to stock bubbles and wild price swings. Plus, with so many cannabis stocks trading for a fraction of a cent to and under 10 cents per share, many of them will, unfortunately, have questionable fundamentals.

This is why so many people are interested in staying out of the stock market. And that’s why they are looking for privately-held cannabis investing opportunities.

Solid, tangible fundamentals, like management and verticals being pursued, drive the performance of privately-held investments. And that’s what makes them so attractive.

Step 5: See Penny Stocks for What They Are

Investing in penny stocks should probably be reserved for experienced day traders.

Why?

Because less experienced investors who decide to invest in cannabis penny stocks should only invest a part of their portfolio. This part should represent that part they can afford to lose.

The very things that attract new investors to penny stocks, like ease, convenience, and excitement, are also the elements that often lead to significant losses.

There may be a very desirable alternative to the penny stock market for buy-and-hold investors who are lucky enough to know someone building a cannabis startup.

financial growth investing in marijuana stocks

Should I Invest in Marijuana Stocks?

Before entering the market, there is a great deal to consider. Investors should research and monitor any cannabis stocks or equity funds and the industry itself.

Significant growth is certainly possible for the global cannabis industry, but that growth may manifest in significant ebbs and flows.

We’ve covered just a few easy steps any investor can take to determine if this investment is suitable for you. Let’s recap:

  1. Take a look at the company’s founder and track record. Vet the managers, make sure that they’re licensed, make sure that they’re registered as a security.
  2. Review assets to understand how legitimate the company is.
  3. Look across the board and find the big names which generally have some assets on the ground.
  4. Then ask important questions like:
    • Do they have cultivation space?
    • Do they have greenhouses?
    • Do they have retail?
    • Do they own real estate?
    • Do they have revenue?
    • Do they have accurate financials?
    • If they’re a middle-of-the-market supply chain company, do they have contracts and customers?
  5. Don’t forget about the companies that don’t touch the actual flower of the cannabis plant. Remember the companies that develop technology or work with packaging.
  6. And then remember that even if all the answers point in a positive direction, that company won’t necessarily turn out to be a winner. Never forget that cannabis stock investments are wildly speculative, and valuations fluctuate considerably.

What Seasoned Investors Do
Accredited investors focused on the long term often seek to self-direct a portion of their portfolio towards socially responsible and sustainable investing goals. These investors often find that the more desirable play is looking to companies outside the stock market.

Conclusion

The global cannabis industry is on the brink of tremendous growth. That point is not up for debate.

Finding the right opportunities to invest in the sector, however, is where the hard work begins.

Using the material in this document as a guide should help you navigate this exciting time as an investor in the cannabis market. For further information, book a complimentary consultation with Gladbrook’s Founder, Warren Blesofsky.

Photo of Warren Blesofsky, Co-Founder & President, Gladbrook

Warren Blesofsky

Co-Founder & President, Gladbrook

Warren is a scientist, real estate broker, environmentalist, and co-founder of the Sklar Center for Restorative Medicine. After graduating from UC San Diego with a Master's degree in Biochemistry, Warren has had several successes in medical research, alternative medicine, real estate, and distressed asset fund ventures. Warren and co-founder Ryan Elmore's mission is to improve our world's health, well-being, and enjoyment by investing in the future of cannabis and plant medicines.

Book a complimentary Cannabis Investing Consultation with Warren.

GET THE FACTS

CANNABIS INVESTING

Learn the science-based facts before investing in the cannabis industry. So you don't get burned! Download the free guide.

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