Although some analysts are sounding bearish on cannabis stocks, most investment experts remain fairly optimistic about publicly owned cannabis companies.
An Industry in Flux
The laws and regulations surrounding the cannabis industry are changing rapidly. At this point, it almost seems as if nothing is set in stone. That’s why you shouldn’t ignore the risks of cannabis investing. Nevertheless, it seems clear that the cannabis industry is here to stay. Additionally, there are unique advantages to investing in a new sector of the market. While new industries are subject to corrections and growing pains, they also hold great promise. Early investors in cannabis can potentially realize tremendous returns. Canopy Growth Corp. (CGC) is one example of a cannabis stock that has provided extraordinary results for investors. Anyone who invested in CGC in 2016 has seen a return of over 640 percent.
The Cannabis Industry’s Complicated Legal Situation
There are four main factors affecting risk in cannabis stock trading. Firstly, the cannabis industry is affected by legal limitations. Though most citizens support legalization in opinion polls, marijuana is only legal in 33 states. Of those states, only 11 have gone all the way and allowed recreational marijuana. Until cannabis is legalized nationwide, cannabis companies will remain held back from achieving their full potential. There is a major grassroots push for wider legalization. Still, achieving this will not be easy. Because marijuana is federally criminalized, cannabis dispensaries can technically face federal prosecution at any time. Though the federal government generally refrains from prosecution, these risks are real. According to the experts at Money Morning, “Canadian cannabis businesses aren’t as susceptible to U.S. legal concerns.” Therefore, investing in Canadian cannabis companies is one smart way to reduce your investment risk.
Valuation and Dilution are Valid Concern
Valuation uncertainty is the second factor that contributes to cannabis stock risks. Because this industry is new and subject to change, it can be difficult to determine when a cannabis stock is undervalued or overvalued. Stock dilution is the third most important risk associated with cannabis investing. Due to the legal issues we previously mentioned, cannabis companies lack access to many traditional sources of corporate funding. Some companies may respond by issuing too much stock. Naturally, oversupply can lead to the dilution of share value.
The Future of Cannabis Stock Investment
Though all of these risk factors are worth considering, cannabis stocks are here to stay. Despite the economic shocks of 2020, it is clear that cannabis stocks remain deeply promising for thoughtful investors. However, it always makes sense to hedge your bets when investing in any relatively new sector. Another good way to limit your risk is to invest in marijuana-based ETFs. These index funds have great potential for growth.
The Complications Of Commodification
Increasingly, cannabis is starting to look like a commodity crop like any other. When a product is commodified, it becomes almost impossible to determine exactly why its price goes up and down. Because commodity producers follow prescribed practices, it can be tough to differentiate them in any meaningful way. This is why you might not want to focus on investing in marijuana growers. Instead, consider investing in retailers and makers of secondary cannabis products. Cannabis-derived salves, balms and lotions have great potential for the future. In addition, you could consider investing in companies like Miracle Gro, which sells a good deal of product to cannabis growers. Companies that provide logistics and support for marijuana companies could also grow and thrive.
Staying Safe Through Volatile Times
Naturally, cannabis investors should follow the same basic precautions as other stock traders. Vitally, one should always maintain a diverse investment portfolio. Diversification can go a long way towards protecting you from the routine corrections and cycles of Wall Street. You can also protect yourself by keeping up with the latest cannabis industry news. While this might not provide you with arbitrage opportunities, it could help you avoid an unforeseen correction. The potential of cannabis investing cannot be overemphasized. Though recreational marijuana dispensaries have been around for a few years now, there can be little doubt that the commercial cannabis sector is in its infancy. This is the perfect time to position yourself to take advantage of this sector’s remarkable growth potential.
Over the course of the next five years, it is almost certain that many new cannabis companies will go public. Though the risks of cannabis investing will always be with us, there are plenty of ways to reduce your personal risk through careful planning.