Here is what you need to know before putting cannabis companies in your investment portfolio.
Despite cannabis (also known as weed or marijuana) being illegal in a large part of the world, the global cannabis market was worth US$28.26 billion in 2021 and is expected to grow to US$197.74 billion by 2028. Gone are the days when venture capital firms would dismiss cannabis companies as problematic investments.
Today, vice clauses (which hold firms back from funding companies that deal in cannabis, gambling and sex) are taking a backseat, with vice companies proving to be effective streams of revenue and profit. If the massive revenue potential of the space sparked your interest, here is the knowledge you need to equip yourself with before you put your money into companies that deal in cannabis.
Types of cannabis companies
There are three broad types of companies whose stocks you can purchase to invest in the cannabis market. These include—marijuana growers and retailers (that grow cannabis crops and then distribute the end product to the users directly), cannabis-focused biotechnology companies (that develop pharmaceuticals by extracting cannabinoids from marijuana) and ancillary product and service providers (that provide the marijuana industry with products, like packaging materials and lighting systems).
Another way to invest in cannabis is by purchasing cannabis exchange-traded funds (ETFs). ETFs are pooled investment securities that operate like mutual funds. They track a particular asset or commodity and can be bought or sold exactly like stocks. As of yet, there are nine cannabis ETFs on the U.S. stock exchange that have US$2.18 billion worth of assets under their management. These ETFs may hold stocks of companies solely in the U.S. or even around the globe, which can be a great way to diversify your cannabis investments.
Benefits of cannabis products
While cannabis is commonly perceived to be a recreational drug, there are in fact medical benefits to marijuana. Marijuana’s medical benefits stem from its compounds called cannabinoids, of which cannabidiol (CBD) is the most heavily studied.
Cannabinoids are prescribed by medical professionals as a way to deal with chronic pain resulting from medical conditions, like arthritis, fibromyalgia, endometriosis and migraine. Besides relieving pain, marijuana is helpful in dealing with mental health conditions, like anxiety and post-traumatic stress disorder (PTSD), as well as neurological conditions, like epilepsy and multiple sclerosis. This should tell you that there is a diverse market for cannabis products, which is a positive sign for the growth of the industry and stock prices at large.
Risks of investing in cannabis
Despite the medical benefits of marijuana, much like any other investment, cannabis also comes with potential risks. One of the biggest risks is that the sector’s future growth relies heavily on legalization. A lot of countries, including China, Japan, South Korea, Ireland and Greenland, have made it illegal to cultivate or use marijuana—be it recreationally or medically.
The legality of cannabis is not free from problems, either. Even though cannabis is legal in certain states in the U.S., there are rules obstructing businesses selling recreational drugs from using banks for their transactions. To counter this, cryptocurrencies, like PotCoin, CannabisCoin and HempCoin, have been developed. However, since cryptocurrencies are known for their volatility, the prices of these tokens may fluctuate and adversely affect businesses that accept them as payment. Some experts even say that these tokens will lose usability and become futile investments as soon as weed becomes fully legal.
Besides the issues of legality, it is also hard to evaluate and predict the risk of investing in cannabis. Since this sector is still in its nascent stages, many companies are trading over-the-counter (without the supervision of a stock exchange). This means that these companies are not required to file any financial statements, and hence investors won’t have the records to read and research the risk of their investments. As a result, it can leave room for fraud, with startups luring investors in with false promises. In 2020, the U.S. Securities and Exchange Commission (SEC) accused a cannabis farm in Seattle of receiving US$4.85 million worth of investor capital and using US$3.5 million of these funds for extravagant luxuries. The farm eventually closed down, with authorities revealing that it was never profitable.
Financial advisors suggest that niche or alternative investments (like cannabis) must be a small part of your overall portfolio. For instance, some recommend not holding more than 5% of such investments and keeping the majority of your money in diversified stocks. Most importantly, before you make an investment in any of these companies, you should put extensive research into their performance. Compare the performance of the company to its competitors to see how it is doing when analyzed in the context of the overall market. Make sure you follow the market as well as political changes (like legalization or regulation of cannabis) closely to better understand the growth potential of the sector.
This article is meant for informational purposes only. Please make investment decisions based on your own discretion.
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