Things that you need to know before investing on the Cannabis Stock Market
By Leonard Kraus
In 2017 the Marijuana Business Factbook stated that cannabis stock market could potentially inject up to $44 billion a year into the US economy. Given that those figures were up from $17 billion in 2016, the incipient industry was alluring enough to attract investors.
While a handful of businesses have achieved success across state lines, most cannabis firms remain small, managed by bold entrepreneurs who swim against the current, while support the legalization. The pot business-people’s tenacity does not, however, guarantee the experience required to conquer the business challenges of the current environment, especially with the “new normal” imposed by the COVID-19 pandemic.
The Cannabis Stock Market
The cannabis stock market is embryonic, most companies are too small to trade on a federal exchange and face challenges coming from the Financial Industry Regulatory Authority (FINRA). As long as cannabis is classified as a Schedule I substance, Wall Street’s regulator-in-chief won’t approve filings from a pot company wishing to go public.
Despite of the regulatory challenges, there is enough legal ambiguity for small investors to moving forward and take advantage of it. For instance, the infamous Penny stocks are the most usual mechanism to trade cannabis securities. This occurs outside the federal exchanges, where regulation is not as tight, meaning due diligence falls on the shoulders of investors.
Beware Of OTC Cannabis Stocks
Many pot companies are offering over the counter (OTC) stock and investors should be careful. There are real risks associated with investing in public cannabis companies offering OTC stock because it usually means this companies can’t meet the financial requirements of major stock exchanges. OTC markets are a place where crooked stock promoters might attempt to separate investors from their money.
Cannabis stocks are risky and might be fit better the more aggressive and experienced investor. For conservative investors, the recommendation might be to wait and see how the situation unfolds. In the meantime, there are large public companies which are already dealing with ancillary businesses of the pot industry, for instance Molson Coors Beverage Company is one of those pioneers.
But even with the great risk of OTC pot stocks, there are brave investors willing to risk due the potential for immense reward. Cannabis stocks are prone to violent fluctuations, and for sure there are players placing their bets hoping for a big future upside. Companies that can successfully make the jump from penny to power stock are rare, but streetwise investors have managed to rake in gains of over 1,000% within a short space of time. The secret lies in finding the right opportunity at the right time… I know, I know, sounds easier say it than do it. Like any other stock, you can purchase shares of a penny stock through your regular stockbroker regardless of whether or not it’s listed on a major exchange. Remember though, there’s a reason brokers and regulatory bodies go to such lengths to make sure that you’re not blindly investing in cannabis stocks.
Where Is The Cannabis Stock Market Going?
Americans are more and more excited in their approach towards medicinal cannabis. According to the National Organization for the Reform of cannabis Laws (NORML), eight out of ten Americans support it. The volume of cannabis stocks listed on the Nasdaq spiked ahead of the election, with some stocks rising as much as 12%.
Interest in cannabis-related stocks has risen from penny stocks to Nasdaq-listed equities. Perhaps unsurprisingly, much stock may have been initially undervalued because investors were hesitant, and the adoption of drugs produced by cannabis-focused biopharmaceutical companies was low. The current options for mainstream investors in this area are limited to a handful of companies listed on the Nasdaq, including GW Pharmaceuticals (GWPH), Insys Therapeutics (INSY), Cara Therapeutics (CARA), and Zynerba Pharmaceuticals (ZYNE).
Reasons To Invest In Cannabis
No doubt legalization is the strongest reason to take the leap of faith to invest in cannabis. Public opinion is demonstrably trending in this direction. Even re-scheduling cannabis as a Schedule II substance would be a huge catalyst for marijuana stocks.
Of course, as a direct consequence to increased legalization, the pot industry was growing rapidly at least until early 2019. But, now in 2020 in the middle of a global virus pandemic which has shaken the core of the society and disrupted almost every single business, it is kind of difficult to predict the near future of the cannabis industry.
Some Advice On Cannabis Investments
Despite the lack of absolute certainty, there is future potential in the cannabis industry. Maybe it’s just a matter of overcome the COVID-19 challenges and take risks once again. In any case, is always healthy to keep certain dose of skepticism when evaluating a business models. Research and due diligence are essential, especially in a nascent industry subject to a lot of uncertainties. Remember that companies involved with the cannabis product itself are still illegal according to federal laws, despite being legal in some states.
Likewise, it’s crucial to consider the investment horizon and market. For example, approximately 14 million Americans currently use cannabis on a regular basis. While that’s a huge customer base, legalization cannot automatically create more adult-use consumers. It’s a capped market that could potentially become saturated with competing products and services.
Remember, in accordance with regulation and legislation the cannabis industry is still developing; variations are to be anticipated. Everything in this industry is new, exciting and potentially rewarding, but also highly risky.