Read on to learn more about how to invest in marijuana companies, why these stocks are unique and how to identify new opportunities.
Understanding marijuana stocks
Marijuana stocks are shares of publicly traded companies involved in the sale, processing or manufacture of marijuana and its byproducts. Marijuana, also known as cannabis, is a psychoactive plant that contains chemical compounds that react with the body's endocannabinoid system. When consumed, cannabis products have produced a variety of both physiological and psychological effects.
People use marijuana for various reasons, including its potential to induce relaxation, alleviate pain, reduce anxiety and enhance mood. The medical and recreational use of marijuana has prompted ongoing scientific research and evolving legal frameworks in different jurisdictions. Until recently, the only law that dictated the legal status of marijuana in the United States was the Controlled Substances Act, which listed cannabis products as a Schedule I controlled substance. It makes it, by default, a highly illegal substance with "no accepted medical use."
Since the introduction of the Controlled Substances Act, most states have introduced additional legislation decriminalizing or legalizing the use of cannabis in some form. In some areas, cannabis products are available only as medicinal products, requiring a prescription from a medical practitioner. In other states, it is available recreationally to anyone over the age of 21, similar to alcohol. The shifting legal status of marijuana throughout the country is sure to be a pressing issue affecting cannabis stocks and producers.
Why marijuana stocks are unique
While marijuana is growing as a product class, it's unlike any other type of stock on the market. The following are just a few features that make marijuana stocks unique.
Risk
Investing in marijuana can be riskier than other asset classes because it is so new as an investment choice. Marijuana stocks began appearing on major exchanges as recently as 2019, and the current industry is still seeing issues related to national legalization.
As a result, the marijuana industry has attracted a significant amount of speculative investment, which can lead to market bubbles and sudden price movements driven by hype and sentiment rather than fundamental factors. Marijuana stocks can be riskier and more volatile than industries, so you should keep your investments a limited part of a diversified portfolio.
Financing concerns
Getting funding has been a significant point of contention in the budding marijuana industry, both in stores and in terms of corporate investors. Many cannabis businesses have faced challenges accessing traditional banking services due to the industry's legal status. While individual states have legalized the use of cannabis, federal payment processors are hesitant to service these businesses for fear of having their funds seized.
Many financial institutions deny banking services to marijuana stocks due to discrepancies between state and federal legalization statuses. It relies on cash transactions, raising concerns about security, transparency and operational efficiency, making investing in marijuana a more difficult sell for corporate investors.
Legalization
The shifting legal status of cannabis products makes investing in the industry a changing and often confusing process. The legal status of marijuana varies widely across different jurisdictions, leading to a complex regulatory landscape. Companies that invest in marijuana are subject to evolving laws and regulations, which can significantly impact their operations, sales and profitability. You'll need to be ready to successfully tackle and track a changing legal and political landscape to invest in weed stocks.
Restrictions on dispensary openings
As cannabis drugs move from Schedule I illegal status to recreationally available, some states have recognized the disproportionate effect the War on Drugs has had on certain marginalized communities. As part of broader cannabis legalization efforts, some states have implemented social equity programs that aim to provide opportunities for individuals with past drug convictions to participate in the legal cannabis industry.
For example, in New York, cannabis has recently become available to purchase for recreational use. Those with previous drug convictions were awarded the first licenses to open legal dispensaries to rectify the damage that cannabis convictions have had. You’ll need to keep this in mind if you’re interested in learning how to invest in weed dispensaries as they become more widely available.
Where are marijuana stocks listed?
In the early days of legalization, marijuana stocks were limited to OTC exchanges, with the lack of public acceptance and funding leading to banking issues. Today, you can invest in weed stocks on most major U.S. exchanges. For example, Canadian-based cannabis products producer Aurora Cannabis (NYSE: ACB) exists on the NYSE. At the same time, you'll need access to the NASDAQ to invest in cannabinoid company The Cronos Group (NASDAQ: CRON).
Trends influencing marijuana stocks
Staying up-to-date on market news is especially important when investing in marijuana, as the substance's legal status is still in question in some areas. We will likely see the following significant trends influencing marijuana stocks in 2023 and beyond.
- Lack of banking access: In 2022, Congress failed to pass the SAFE Banking Act, a bill to help cannabis companies secure safe and legal access to financing. This failure to act could lead to a lack of investment options and industry stagnation.
- Shifting legal status: While most states in the country have introduced laws decriminalizing or legalizing cannabis, it remains illegal at the federal level. As activists push to remove marijuana from the Schedule I drug list, the results will have a broad impact on the investment market. More funding options may become available should cannabis be decriminalized or demoted at the federal level.
- Continued research into health benefits: Due to the historical legal restrictions on marijuana, research into its medical benefits and potential applications has been limited. As regulations evolve, more research will potentially lead to breakthroughs that could impact the industry's growth and product offerings.
7 steps for investing in marijuana stocks
If you've bought stock in the past, there's good news — buying pot stocks follows the same process closely. Here's how to invest in marijuana stock for the first time as a novice investor.
Step 1: Consider the broader market.
The cannabis market is inherently dynamic, with regulatory factors and a changing legal status influencing both asset prices and the types of companies that can go public — maintaining curiosity about the current economic and political climate and how it is affecting legalization efforts is essential for any cannabis investor. Choose a reliable, unbiased news source, and keep up with how the industry changes as you invest.
Step 2: Understand the differences in marijuana stocks.
Like the healthcare industry or the finance industry, there are many types of companies that make up the cannabis market. Investing in the marijuana industry requires a nuanced understanding of the diverse company types that make up this evolving sector. The following are some major types of marijuana companies you’re likely to see as you compare investment opportunities.
- Growers: Growers might be some of the first companies that you think about when you think of marijuana companies involved in the harvesting and processing of cannabis plants. Larger, well-established cultivators may benefit from economies of scale, while smaller craft growers might target niche markets.
- Retailers: Retailers are another major arm of the cannabis industry, connecting customers with their needed products. When assessing retailers, examine their geographic reach and the brand’s ability to adapt to changing consumer preferences.
- Biotech companies: Biotech firms in the cannabis space focus on the research and commercialization of cannabis-based medical therapies and treatments. Review previous successful drug trials (if any) when evaluating biotech companies.
- Ancillary products and services: Companies in this category provide essential products and services that support the cannabis industry but don't directly handle the plant. For example, some companies might focus on providing real estate suitable for growth, while others might offer tech solutions to help manage inventory.
Diversifying your investments across multiple types of companies can help limit your risk in each sector.
Step 3: Understand the different investment types.
Now that you know which types of companies you may want to add to your portfolio, you should consider which assets you'll use to invest in them. There are multiple types of cannabis-related assets specifically, including the following classifications.
- Stocks: Stocks are the most common option for investing in marijuana through a major market. Stocks represent individual company ownership shares and can be bought and sold throughout the day. Most cannabis stocks are issued by companies that produce, manufacture, distribute or otherwise work with legal cannabis products. The Canopy Growth Corporation (NYSE: CGC), a major international cannabis producer based in Canada, is an example of a marijuana stock.
- ETFs: Exchange-traded funds (ETFs) are collections of stocks that trade together throughout the day as a unit. When you purchase shares of an ETF, you're essentially pooling your money with other investors and gaining exposure to all of the stocks listed in the underlying fund. Many cannabis-themed ETFs have appeared on the market since legalization efforts began, including the Roundhill Cannabis ETF (BATS: WEED).
- REITs: A real estate investment trust (REIT) is a unique type of company that owns and operates commercial or residential real estate, leasing the space out to tenants. Many cannabis-related REITs have popped up, providing legal and climate-controlled spaces for growers to perfect their craft. Cannabis REITs like the Innovative Industrial Properties (NYSE: IIPR) are part of a growing trend, purchasing and leasing growth space to cannabis investors.
Consider incorporating multiple assets into your portfolio for more diversification.
Step 4: Open a brokerage account.
A brokerage account is a type of investment account that allows you to invest in assets like stocks and ETFs online. Explore the multiple types of brokerage accounts and open an account with a broker that offers access to the markets you need.
Step 5: Link a funding method and place a buy order.
After your brokerage account is opened and approved, you can place a buy order for your selected asset. Buy orders are instructions that tell your broker what price to buy an asset, how many shares or units you're purchasing and additional details that limit loss. After placing your order, your broker will execute it automatically — or cancel it if purchase conditions are unmet.
Step 6: Monitor your investment.
What you’ll do next will vary depending on your investment strategy. Monitor how your investment changes in value over time, and set predefined conditions that inform your exit strategy. You might also want to set a stop-loss order, which automatically liquidates your assets if prices suddenly fall drastically.
Step 7: Manage dividends.
If you invest in a dividend-producing asset (like a cannabis REIT), you might want to enable an automatic dividend reinvestment program (DRIP). When the dividend is paid, DRIPs automatically reinvest your dividends at the current market rate. This can be a convenient option for long-term investors looking to build their portfolio holdings over time.
Tips for investing in marijuana
As you compare marijuana stocks, it can be overwhelming to consider all of your options. Use these tips to invest in cannabis stocks or other assets for the first time.
- Differentiate between medical and recreational companies: Marijuana is available for medicinal use in some states and recreational use in others. Keep track of how regulations are changing throughout the country, and consider adding multiple types of companies to your portfolio to enhance sector exposure.
- Examine product diversity: Companies with a diverse range of cannabis products, such as flower, edibles, oils and concentrates, may be better positioned to capture a broader market share and adapt to changing consumer preferences. Research recent product launches before investing in commercial retail companies.
- Invest in multiple assets: Not confident in your ability to assess individual stocks? Consider an ETF, which includes a professionally-selected basket of assets within the sector.
Investing in pot stocks
While the marijuana industry presents a host of exciting investment opportunities, it's important to remember that most individual companies are relatively new. Invest only a small percentage of your total investment capital into marijuana investments, as the changing political climate surrounding marijuana legalization may cause future volatility.
Marijuana can be a good investment if you're an investor ready to accept a higher level of risk and volatility. If you're an investor primarily focused on capital preservation, more volatile marijuana stocks may not be the best choice for your portfolio.
The best marijuana stock to add to your portfolio could vary depending on investment goals. Aphira (NASDAQ: APHA), The Canopy Growth Corporation (NYSE: CGC) and GW Pharmaceuticals (NASDAQ: GWPH) represent some of the largest companies in the industry when measured by total market capitalization.
The price of an individual share of the stock fluctuates on a day-to-day basis and varies by company. Some marijuana stocks are penny stocks, allowing you to gain industry exposure for less than $1 a share.
