How to Invest in Cannabis Stocks

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When it comes to popular investing trends, cannabis stocks are near the top of the list. The marijuana industry has grown rapidly over the past decade. And this makes investing in cannabis a more attractive opportunity than ever.

Because the industry is so young and still faces legal challenges — such as marijuana being illegal at the federal level — it's important to do your research and learn how to invest in cannabis stocks.

The Short Version

  • The cannabis industry has been expanding rapidly in recent years and is expected to continue growing.
  • There are many companies for investors to choose from, including companies involved with medicinal and recreational cannabis.
  • Besides stocks, you can also invest in cannabis ETFs and cryptocurrencies.
  • Because marijuana is still illegal on the federal level, there is a greater level of risk.

What Is the Cannabis Industry?

The cannabis industry consists of the different activities and companies involved in the cultivation, production, transportation, sales and consumption of legal medical and recreational marijuana products.

The cannabis industry has experienced incredible growth in recent years. And it is expected to have a compounded annual growth rate of more than 26% between 2021 and 2028.

Paired with this increase is a drastic change in public opinion surrounding the legalization of marijuana. A 2020 Gallup poll found that 68% of adults support legalizing marijuana, compared with just 12% in 1969. And though marijuana (MJ) is still illegal at the federal level, an increasing number of states have legalized it for medical and even recreational use.

Because of this rapid growth and the change in public opinion surrounding MJ use, it comes as no surprise that cannabis as an investment has also become increasingly popular. And there are now many ways to invest in cannabis, which we'll cover in this guide.

Medical vs. Recreational Cannabis Stock

When it comes to the marijuana industry, there are generally two different markets: medical marijuana (MMJ) and recreational marijuana (RMJ).

Medical Marijuana Stock

Medical marijuana first became legal in California in 1996. But today MMJ is legal in 36 states, the District of Columbia and three U.S. territories. Because it's so widely legalized — and has been for quite a few years — there are plenty of opportunities to invest in MMJ stocks. The categories of companies whose stock you can purchase when it comes to medical marijuana are:

  • Growers
  • Extraction service providers
  • Drug developers
  • Distributors and dispensaries
  • Ancillary product and service providers

Recreational Marijuana Stock

Recreational marijuana (RMJ) is legal in 17 states, the District of Columbia and two territories. Colorado and Washington became the first states to legalize the recreational use of marijuana in 2012. Legalization for RMJ hasn't gained traction as quickly as it has for MMJ. But this use caters to a significantly wider audience. Marijuana companies you can invest in for recreational marijuana include cannabis growers, retailers, and ancillary product and service providers.

Why Investors Should Buy Cannabis Stocks

As marijuana legalization becomes more widespread, it's going to become more common to find cannabis stocks in investors' portfolios. You may find yourself wondering whether you should be joining in.

The first reason to consider investing in cannabis stocks is the rise in price. Marijuana stock prices began to rise in November 2020 after the election. Many investors expect the change in administration to be positive for the future of the cannabis industry. As public policy and public opinion continue to shift when it comes to marijuana use, it's likely we'll see this stock growth continue.

Another excellent reason to invest in MJ stocks is the large number of companies to choose from, some of which carry less risk than others. One of the reasons people are hesitant to invest in marijuana stocks is that these companies may have a more difficult time getting financing through traditional means. But there are plenty of companies that offer ancillary products and services that don't hit these same roadblocks.

For example, Scotts Miracle-Gro is a company that's been around since long before the current cannabis industry. But as more states started to legalize both medical and recreational use, Scotts embraced cannabis as another part of the gardening industry. Scotts stands out as having one of the largest market capitalizations among cannabis companies without actually producing or selling cannabis.

That being said, because of the nature of cannabis products, there may be an increased risk to investors. And it's important to understand those risks and weigh them alongside the benefits.

Further reading>>> Investment Risk 101

Top Marijuana Stocks in 2021

The cannabis industry is growing rapidly. And as a result, there is no shortage of MJ stocks to invest in. Some of the top marijuana stocks with market capitalizations above $1 billion include:

Stock Market Capitalization(as of October 22, 2021) Company Type
Scotts Miracle-Gro (SMG) $8.25 billion Ancillary product and service provider
Curaleaf Holdings (CURLF) $7.44 billion Cannabis growers and retailers
Innovative Industrial Properties (IIPR) $6.1 billion Ancillary product and service provider
Canopy Growth Corporation (CGC) $5.5 billion Cannabis growers and retailers
Trulieve Cannabis (TCNNF) $5.4 billion Cannabis growers and retailers
Green Thumb Industries (GTBIF) $5.3 billion Cannabis growers and retailers
Cresco Labs (CRLBF) $2.2 billion Cannabis growers and retailers
Cronos Group (CRON) $2.2 billion Cannabis growers and retailers
Aurora Cannabis (ACB) $1.5 billion Cannabis growers and retailers
GrowGeneration (GRWG) $1.4 billion Ancillary product and service provider

Should You Invest in Marijuana ETFs?

Investing in marijuana exchange-traded funds (ETFs) can be an excellent way to add MJ stocks to your portfolio. By diversifying your portfolio across many companies in the industry through an ETF rather than investing in just one or two stocks, you're spreading your risk and reducing your chance of significant losses.

Some of the top marijuana ETFs include:

  • ETFMG Alternative Harvest ETF (MJ)
  • AdvisorShares Pure US Cannabis ETF (MSOS)
  • AdvisorShares Pure Cannabis ETF (YOLO)
  • Global X Cannabis ETF (POTX)
  • The Cannabis ETF (THCX)

Find out more >>> Should You Invest in Cannabis ETFs? 

Marijuana Cryptocurrencies

Another way to invest in cannabis is through marijuana cryptocurrencies, more often known as “cannabis coins.” Both cannabis and cryptocurrency are relatively new in the investing world.

And because both cannabis and cryptocurrency are newer to the financial scene — and are both seen as outsiders in many ways — they make a natural pair. Today there is a variety of these cannabis coins in circulation.

The most popular marijuana cryptocurrencies in order of market capitalization are:

  • Tokes (TKS)
  • PotCoin (POT)
  • HempCoin (THC)
  • CannabisCoin (CANN)
  • DopeCoin (DOPE)

How to Invest in Cannabis

Ready to start investing in cannabis? In many ways, investing in the cannabis industry is similar to investing in other industries in which there is a variety of stocks and ETFs to choose from. On the other hand, the marijuana industry is an incredibly small component of the overall financial market. And many of the companies are newer with less of a track record than others. Here are a few steps to follow when you decide to invest in cannabis:

  1. Decide what type of company you want to invest in. There are many components of the cannabis industry. Would you rather invest in MMJ or RMJ stocks? Would you prefer to invest in growers, distributors, biotech companies or ancillary product and service providers?
  2. Decide what type of asset you want to invest in. When it comes to investing in the cannabis industry, your most accessible options are MJ stocks, MJ ETFs and cannabis coins. An MJ ETF could be better suited to those investors who want to minimize their risk, while a more adventurous investor may prefer MJ cryptocurrency.
  3. Weigh the risks and benefits. Every type of investment comes with an inherent level of risk. And in general, the greater the risk, the greater the potential reward. Before investing in cannabis (or any other investment opportunity), weigh the risks and potential benefits.

Risks of Investing in Marijuana Stocks

Before you invest in MJ stocks or ETFs, it's important to consider the risks. As a relatively new industry, MJ stock prices can be volatile. And the industry is sure to face some roadblocks that others don't. Here are some of the risks involved in MJ stocks:

Marijuana is illegal at the federal level. No matter what happens in individual states, there are still federal laws prohibiting the sale, possession and use of MJ. And though the industry has still thrived in states that have legalized it, that could change in the future if the federal government decided to take action.

Companies in the cannabis industry face banking challenges. Because MJ is illegal at the federal level, many banks won't service companies in this industry. As a result, it's more difficult for these companies to raise capital to grow. Companies are often left to issue additional shares. And this of course dilutes the value of all existing shares.

There's no long-term history to prove the industry's track record. With older industries such as financial services, health care and real estate, there are decades — and in some cases a century or more — of stock performance to look at. But past performance is no guarantee of future returns. Still it's sometimes the best indicator we have. But in the case of cannabis stocks, we simply don't have much history to look at.

The Future of the Marijuana Industry in America

Though there's no way to guarantee the future of the MJ industry, there are some solid indicators we can look at to determine how successful it may be in the future.

First, more and more states continue to legalize both MMJ and RMJ. And the more widespread legalization becomes, the larger the market for legal MJ products. Not only are laws changing, but public opinion is as well. Recent polling shows that a significant majority of Americans favor marijuana legalization. Finally, we can look at financial predictions, which predict the market will continue to grow substantially.

Ultimately, there are no guarantees. Current predictions could turn out to be incorrect. And the pendulum of public policies and opinion could swing the other way. But based on the growth thus far, that seems unlikely. That being said, investors should proceed with caution before investing in the cannabis industry.

The Bottom Line

The cannabis industry is a relatively new opportunity for investors. But it's becoming an increasingly popular one. There is a variety of ways to invest in cannabis stocks. You can invest in either medical marijuana or recreational marijuana. And you can choose from stocks, ETFs and cryptocurrencies. But marijuana stocks are still a volatile investment, and investors should know that they have a higher risk than other investing opportunities.

Kat Peach

Although Katherine Peach originally intended to become an archaeologist, she has now been working as an editor in the financial publishing industry for more than 10 years. (Unearthing ideas about improving your personal finances isn’t such a bad career alternative!)

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