How To Invest In Marijuana Without Loss | Easy Step-by-Step Guide

Even though Marijuana is not legal in some states in the United States of America, it is gradually becoming a good investment opportunity. However, most people don’t know how to invest in marijuana stocks.

Yes, some cannabis-producing companies’ have gone public and have their stocks trading on the floor of the NASDAQ.

Marijuana users are growing way faster than the plant. And despite the global crackdown on users of cannabis, the global number of users is estimated at 263 million people. Meanwhile, it’s also estimated that the industry (Ilegal and Legal) is worth around $340 billion.

According to Statista Worldwide spending on cannabis is on pace to top $29 billion in 2020. The total is projected to increase to $63.5 billion by 2024, for a compound annual growth rate (CAGR) of 21.

Additionally, about 50 countries world over has legalized medical marijuana while 6 countries has legalized it for adult’s recreational purposes.

When you look at these stats, and the projections in ten years, it’s actually easy to understand why the stock for marijuana is now publicly traded.

For potential investors, you need to understand certain principles around investing in marijuana stocks. And you’d agree with me it isn’t just your usual stock.

It is for the purpose of helping you understand the necessary steps you must take while investing in marijuana stocks that this piece was written. So sit back and read through.

Meanwhile, take a look at our table of content for an overview of this article.

How To Invest In Marijuana/ Cannabis Without Loss

There are specific approaches you must take if you want to invest in Marijuana stocks without losing money. Here’s our guide.

#1. How Many Types Of Marijuana Products Do We Have?

Marijuana is of mainly two types. Medical and Recreational Marijuana. While about 60 countries the world over has legalized medical marijuana, recreational marijuana is only legal in 6 countries of the world. The USA and Canada Inclusive.

People who read this content end up reading How To Make Money in the Stock Market in 2022: Full Guide

#2. Know The Different Types Of Marijuana Stocks.

#3. Know The Risks Involved

• Legal and political risks: 

In the United State of America, selling marijuana remains illegal at the federal level.

Even though cannabis is legal in some states, the Department of Justice could clamp down at any time.

Additionally, U.S. federal law places severe restrictions on banks that deal with marijuana-related businesses.

As a result, it’s difficult for U.S. cannabis businesses to access critical financial services.

Political support has increased for federally legalizing marijuana, but there’s no guarantee it will happen.

• Supply/Demand Imbalances: 

Canadian marijuana growers initially undertook major expansion initiatives. This was in a bid to increase production capacity to meet recreational marijuana demand.

However, some companies have now cut back on production. When supply outstrips demand, prices usually fall.

In this scenario, marijuana growers could find their revenue and earnings decreasing, which would hurt their stock prices.

• Over-the-counter (OTC) stock risks: 

OTC stocks don’t have to file regular financial statements. Without financial statements, it’s pretty difficult for investors to access the risk of stocks. Investors would always like to know what they are getting into.

Additionally, they don’t have to maintain minimum market caps. This the total value of outstanding shares which can result in a low level of liquidity.  

Liquidity is how easily the stock can be bought or sold without its price being affected.

• Financial constraints:

 It’s not easy to source cash for any business, Cannabis business included.

Many cannabis companies are unprofitable and might run out of cash.

They often have to raise capital by issuing new shares, which dilutes the value of existing shares. Even with this option, obtaining enough capital to fund growth can be challenging.

#4 Know What To Look For

Before you consider any stock at all, not only Marijuana stocks, you must do the following:

#5. Assess The Top Marijuana Stocks And ETFs

Check out marijuana focused exchange-traded funds (ETFs).

#6. Invest Carefully

Start off with a small position in marijuana stocks. Also, don’t make Marijuana stocks your major stock in your investment portfolio. Most conservative investors wouldn’t touch marijuana stocks, because of how risky the stock is. However, there’s no profit making investment without risks.

The stocks are usually volatile, which makes it both profitable and risky. Watch the cannabis market with eagle eyes and ascertain when best to swoop in, and don’t be shy to pull out if your due diligence suggests so.

While marijuana stocks are risky, there are safer ones.

Additionally, Identify those cannabis companies with a steady leadership, and potentials to grow, then bank on them.

#7. Watch Out For Changes In The Industry

Every investor should have a long-term view in mind while investing in stocks. But with marijuana stocks, dynamics can always change, and you must change with it to avoid losses

Therefore, you must continue to monitor your marijuana stocks or ETFs and the industry as a whole. This will help you spot changes that might affect the industry. It could be politically motivated changes or any other change that might affect growers.

What Are The Risks In Marijuana Stocks?

Before buying marijuana stocks or ETFs that hold marijuana stocks, you definitely need to be aware of the risks associated with investing in the marijuana industry. Some of these risks are common to stocks of any industry and include potential threats from the competition and the possibility of scandals. But there are some risks that are especially applicable to marijuana stocks.

The market caps for most marijuana stocks are very high compared to their historical sales. A lot of their valuation hinges on expectations of tremendous growth. If this growth isn’t achieved as quickly as possible, their share prices could plunge.

Many marijuana companies aren’t profitable yet. As a result, they must resort to issuing new shares to raise the cash needed to fund operations. The issuance of new shares, though, causes dilution in the value of existing shares.  

How does dilution hurt shareholders? Suppose a company has 10 million outstanding shares — the total number of shares investors own, including those held by company insiders — trading at $50 per share. That would give the company a market cap of $500 million. If you own 1 million shares, your investment is worth $50 million. If the company issues 10 million new shares and the market cap remains constant, each existing share would be worth $5 rather than $10 because of the impact of dilution. And your investment, which was originally worth $50 million, would now be worth only $25 million. 

The stocks of marijuana companies that operate in the U.S. face the risk that the federal government could opt to enforce federal marijuana laws in states that have legalized medical or recreational marijuana. Although this threat doesn’t appear to be too great, there have been some conflicting signals from the Trump administration. 

However, with the incoming administration, things might remain the way it is for a long while.

Should I Invest In Marijuana Stocks?

This is an important question every potential marijuana investor must answer for him or herself. Marijuana stocks like we said earlier is volatile, so you need a lot of tolerance to be able to invest in marijuana stocks.

Marijuana stocks definitely present high-risk, high-reward propositions. But while the risks are real, the rewards may or may not be realized.

The hack for me would be to start off with a little position, that way you don’t feel too much of the sting if the stock plummets.

There are ways to reduce risks to some extent. As mentioned earlier, marijuana ETFs provide diversification across multiple marijuana stocks. Stocks of companies like Constellation Brands that have primary operations in other industries also can lower your risk level. But even taking these alternatives doesn’t eliminate all risk.

Final Thoughts:

Sometimes in my private time I ask myself some “what ifs” questions.

Like what if I bought Apple shares when it was way cheaper, what if I had bought Amazon shares before it became the giant that it is today.

The answer I’m sure is very obvious. I’d be richer than I am right now if didn’t sell it at some point that is. But I didn’t buy the shares, just like many other Americans.

The marijuana stocks might be another “Amazon stocks ” waiting to happen. With a liberal administration coming in, there might be endless possibilities for marijuana stocks if it’s legalized at the federal level.

Also, there are bills seeking to remove if from controlled substance list.

So if you can afford it, buy some marijuana stocks using the steps we’ve discussed here and see how it pans out.

If it plummets, you’d say you tried, but what if doesn’t? That’d be a huge cash-out. Good luck.

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