How to Invest in Cannabis Stocks: 5 Things to Know

Before you invest in the rapidly expanding but extremely volatile cannabis industry, here are some things to watch out for.

Global marijuana stocks are expected to reach $63.5 billion by 2024, meaning that if you aren't already considering investing in cannabis, now might be an optimal time—particularly because people have never been more in need of the stress-relief that this product can provide.

Before investing, if you're a total beginner, you'll need to start building your investment portfolio. Apps like Robinhood can help you buy, sell, and monitor stocks in minutes, while sites like Vanguard provide more comprehensive options. Then you'll want to set aside an investment budget, which will look different for everyone. In general, you'll want to invest around 10 percent or less of your portfolio into individual stocks.

Here are five steps you need to take in order to invest successfully in the cannabis industry.

Understand the different types of marijuana stocks you can invest in

There are two main types of marijuana stocks you can invest in: medical and recreational. In the United States, medical marijuana is legal in 33 states and can be prescribed by doctors. CBD is one of the more popular types of medical marijuana and has been proven to be an effective way of combating epilepsy, as well as several other rare diseases.

The other, riskier option is to go ahead and invest in recreational marijuana. 11 U.S. states have legalized recreational marijuana, but it's been legal in Canada since 2018.

Decide what type of product you want to invest in

If you're going to invest in marijuana, you have three main options. You might invest in a cannabis grower and retailer, such as Canopy Growth; you might invest in a cannabis biotech company like GW Pharmaceuticals, which focuses on developing cannabinoid drugs; or you might choose to invest in a company that creates products for cannabis growers.

Do your research on your company of choice

Now that you know a bit more about how to go about investing, it's time to do your research. Companies that can grow cannabis for a lower cost will be more competitive, and companies with international connections can be more reliable. It's also important to examine whether the company you're investing in is growing sustainably. Scroll through reports from the past few years to see which companies are strongest and most promising.

Money Done Right suggests that you break your research down into two parts:

  1. Fundamental analysis (which focuses on key information like quarterly profits and income)
  2. Technical analysis (which focuses on price performance and stock price patterns; this takes more effort and might require some outside help)

Regardless, you'll probably want to invest in a variety of cannabis companies. Apps like 420 Investor, Stash, and MarketWatch can help you keep track.

4. Know the risks

Cannabis is definitely a volatile industry. It remains federally illegal in the U.S., and though the industry is expanding, initial stocks have performed shakily. You may want to consider investing in medical marijuana products first before leaping into the recreational sphere.

5. Try out these companies

Despite the risks, some cannabis companies have performed better than others. Some of the best-reviewed marijuana stocks in April 2020 were:

Innovative Industrial Properties

This is a real estate investment trust that focuses on the medical cannabis industry. "A high-pedigree management team and strong business fundamentals helped IIPR raise $250 million in January despite the tight market," said Michael Underhill of Capital Investments in Wisconsin. "The stock's more than 25% year-to-date increase compares favorably to the -15% return of the North America Marijuana Index."

Curaleaf Holdings

This company operates in 12 states in the U.S., and it's America's only cannabis producer that works in the medical, recreational, cultivation, processing, and dispensary sectors. It has a "reported third quarter pro forma revenue of $129 million and adjusted EBITDA of $9 million."

Cronos Group

This Canadian-based investment group is dominating the international medical marijuana market. With a cash balance of CA$1.47 billion at the end of the third quarter, Cronos is growing fast.

Canopy Group

Canopy reported a $2.07 billion in cash equivalents in January. Plus, they now have a license to grow hemp in New York and have launched a massive cultivation facility. They also launched First & Free, an online company that sells hemp and CBD products, and they've partnered with Martha Stewart to sell their products.

Tilray

Tilray is another great option in the CBD sphere. The company acquired Manitoba Harvest, a stock worth $419 million Canadian dollars, in February 2019, allowing the company to spread its hemp distribution capabilities around the world.

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