Marijuana stocks have been getting a lot of buzz lately. With states rapidly legalizing both recreational and medical marijuana, the market’s doing well, and investors are reaping the benefits.
But this risky investment might not be the best choice for every stock portfolio. Before you jump on the bandwagon, take a look at the pros and cons.
First, let’s talk about how stocks work
When you buy an individual share of stock, you’re buying a small share of ownership in the company and its income. Your investment grows when the company does well.
Since you can’t always tell which stocks will succeed, most experts recommend buying shares in several different companies -this is also known as diversifying.
Once you develop a stock portfolio, you can manage it in a few different ways. With a mutual fund, investors take a hands-on approach in buying and selling stocks. With an exchange-traded fund or ETF, also known as an index fund, investors don’t actively manage the portfolio. Instead, an ETF puts together a diversified group of assets for you. Because mutual funds require more strategy and planning, ETFs are often a good vehicle for new investors.
Can you invest in marijuana stocks?
You can. The market is a lucrative one, projected to exceed $150 billion in the next 10 to 15 years.
There are three major categories of companies selling marijuana stock:
- Growers and producers. These are cultivation centers and dispensaries where marijuana is grown and distributed.
- Drug makers. These are usually pharmaceutical or biotech companies using medical marijuana as an ingredient in prescription drugs.
- Ancillary product and service providers. These companies may sell marijuana-related products (like lighting and equipment to dispensaries) but don’t sell marijuana itself.
Since marijuana is still illegal on a federal level in the United States, you’ll be taking on some legal risk. In Canada, where marijuana was legalized nationwide in 2018, it’s much easier to find reputable marijuana stocks. But even in the United States, it’s possible.
Most companies trading in marijuana stock in the United States sell these stocks over the counter. But a growing number are profitable enough to be listed on public exchanges like the NASDAQ.
How do you invest in marijuana stocks?
Pick a promising company and do your research, just as you would with any other potential stock investment. You want to invest in stock that’s poised to make a profit in the future as the market continues to grow.
Look on the investor relations websites of the company you’re considering, and find the answers to a few questions:
- Does the company grow marijuana? If so, how much?
- How does the company intend to stand out from its rivals?
- What is the company’s long-term growth strategy?
- If the company is not yet profitable (some new companies aren’t), how does it plan to profit? How will it fund operations until then?
- How much experience do members of the business team have?
- What supply agreements does the company have?
- Which geographic markets is the company targeting? (This is a particularly important question for marijuana stocks. Some companies only target small areas where marijuana is legal; others have the capacity to expand overseas. Larger markets may mean both more opportunity and more risk.)
Stay on top of the latest news in marijuana trades. The market is still emerging, and change can happen quickly.
Where do you invest in marijuana stocks?
Canadians are in luck; many profitable marijuana-related companies trade on the Canadian stock exchange. But if you’re trading in the United States you can still purchase marijuana stocks in a few different ways.
- From a major stock exchange. Larger marijuana companies like GW Pharmaceuticals (GWPH), Tilray Inc. (TILRAY), Aphria Inc. (APHQF), and Canopy Growth Corp. (CGC) trade on the NASDAQ or NYSE.
- Over the counter through a broker or robo-advisor. Even if a company only trades on Canadian stock exchanges, its stock may be available over the counter in the United States.
- As an ETF. You can buy an ETF focused on marijuana-related investments, giving you automatic diversification. Funds include the Horizons Marijuana Life Sciences Index ETF (TSX: HMMJ) and the ETFMG Alternative Harvest ETF (NYSEMKT:MJ). Each fund tracks a different “index” or sector of marijuana-related companies.
Should you invest in marijuana stocks?
That depends on a few factors, including your investment goals, your timeframe, and your comfort level with risk. There’s no clear cut answer ever with this question, but here’s where I come down.
If you invest, start with a small investment
Because the industry is relatively new, most marijuana stocks are speculative, meaning they may or may not pay off for investors. Be prepared for the market to fluctuate quite a bit and for prices to change as the industry finds its footing.
For this reason, it makes sense to start off with a relatively small investment. If the fund does well you can consider adding more stock.
You may also want to buy stock in marijuana-related companies that primarily focus on other industries, so even if their marijuana operations fail, the company will still be profitable. And give the investment time to mature. Plan on not touching any funds in marijuana stock for at least five years.
Long-term investors may profit eventually
Long-term investors who prefer to “buy and hold” should consider ETFs where most of the stock is in marijuana-related companies.
The diversification gives you a greater chance one of the companies will strike it rich even if others don’t.
Individual marijuana stocks may be the way to go
Individual stocks may lead to higher returns. Investors who want to buy individual stocks should research a variety, ideally combining new companies with more established ones.
You can also pick companies performing different functions within the industry—producers, pharmaceutical or biotech companies, and ancillary service providers.
Why marijuana stocks are risky
The industry is high-risk for a few reasons.
Marijuana stocks don’t have a long history
First, it hasn’t been around that long in the United States, where recreational marijuana didn’t become legalized on a state-by-state basis until 2012.
Many marijuana-related companies are young, meaning they’re more likely to fail, and there’s less publicly available information for investors to research.
This early in the game it’s hard to tell whether the excitement around the industry’s profit potential is more than hype.
There are many scams
The industry’s popularity means fraudsters are especially common. The Securities and Exchange Commission even issued a warning about marijuana trading scams.
Be on the lookout for symptoms of investment fraud, including unsolicited offers and overblown promises of high returns.
It can be legally risky for those with certain careers
The legal landscape surrounding marijuana is tricky. Most investors aren’t likely to face legal consequences for buying shares in the industry. You’re investing in the drug, not producing, selling, purchasing, or using it yourself.
For government workers who require a security clearance, however, the investment might raise a red flag. If you’re buying stock in another country such as Canada, where the market is more robust, the purchase of foreign stocks might threaten security clearance too. And the companies you invest in are liable to federal enforcement crackdowns, even if they operate in states where marijuana is legal.
Bottom line: Proceed with caution, do your research, don’t anticipate huge returns, and don’t invest any money you can’t afford to lose.
Are marijuana stocks good for young investors?
New investors may want to put their money into more tried-and-true industries. Once you’re more comfortable allocating your assets and more aware of your investment style and goals, the marijuana industry might be worth looking into.
Investors who are more aggressive, and willing to take on some risk, can potentially get in on the ground floor of a tremendously profitable company. With more marijuana-related businesses trading publicly and more medical uses developing for the drug, there’s a chance your investment will take off.
But because of the risk, it’s especially important to diversify. A marijuana ETF may be the way to go if you’re interested in buying marijuana stock but unfamiliar with the industry in general.
Safer alternatives to marijuana stocks
Curious but not quite ready to invest in marijuana stocks? You can invest in related industries without taking on the risk of investing in marijuana itself.
Your portfolio might include funds in:
- Pharmaceutical companies
- Biotech companies
- Agricultural commodities
- Healthcare providers and suppliers
- Manufacturing companies
- Life sciences and technology companies
Marijuana stocks are growing in popularity, but it’s important to look at them with a critical eye. Marijuana is still federally illegal, making investing in them a risk.
But for those willing to keep a diversified portfolio, marijuana stocks earn you a good chunk of change some day. As with everything stock and investment-related, time will tell, and I’ll be curious to follow this what ends up happening on this front.