In 1996, California made medical marijuana legal and sparked a trend that would domino into the modern marijuana business of today. Since then, many states and Canada legalized recreational marijuana with expected growth potential of more than $22 billion by 2022.
Many other states are expected to legalize recreational cannabis soon. Businesses ranging from beverage makers to gardening companies cashed in on the marijuana frenzy. Many companies have gone public, but is investing in marijuana a good idea?
Investment may seem like a no brainer. Before you join the weed bandwagon, learn the pros and cons of investing in marijuana stocks.
The Cannabis Business is More Than Marijuana
When people think of recreational marijuana, they imagine shops filled with bongs. There’s a wide array of herb to choose from and a few edibles. The reality is the marijuana is business is much bigger than a few stores.
There are various marijuana businesses to invest in. Companies that grow the plants and sell them to dispensaries. Major brands like Coke, Pepsi, and Heineken planning marijuana-infused beverages.
There are manufactures of hydroponic equipment and specialized soil for growing the product. We can’t forget the countless CDB oil companies already selling lotions, edibles and other CDB products.
Drug companies researching drugs using CBD and cannabis for epilepsy and other illnesses.
These are all companies to invest in that are outside of the dispensaries themselves.
The Current Climate for Investing in Marijuana
There’s no doubt that marijuana is a hot investment right now. States that legalized it for medical and recreational use report massive sales.
Canada marijuana businesses are booming with companies investing in new products. Dispensaries pop up on every corner.
New companies breaking on the scene are starting with high valuations and raising capital for revolutionary products.
It’s this current and expected growth of marijuana in the United States and Canada that makes the case for investing in pot stocks. All signs of growth point to it coming true, but there’s no guarantee.
Investors not interested in risk and volatility may not like marijuana stocks. Those willing to take a chance may find it lucrative.
The marijuana business could triple by 2022. That’s enough to have many investors get involved on the ground floor.
The United States of Cannabis
Despite the legalization of medical and recreational cannabis in Canada and several states, the United States as a whole is the biggest risk to expected growth.
Marijuana is still illegal on the federal level. While the government hasn’t come down on the legal marijuana industry, they do have that option.
For example, state police won’t raid a legal cannabis dispensary in Colorado if they run their business within the confines of the law. The Drug Enforcement Agency can raid and charge the business with federal crimes.
Much of the anticipated growth of the industry depends on further legalization in the U.S. Bills created around cannabis legalization are making their way across many states or planned in the near future.
If that doesn’t happen or the federal government cracks down, then it could have a destructive impact on growth.
High Valuation Marijuana Companies
While there are several investing avenues for cannabis, the growers and dispensaries are the most visible. Many of the companies have gone public with the goal of raising capital.
They’re entering the market with a high valuation, so you’re purchasing the stocks at a premium. The ultimate goal of investing is making money. High valuation stocks have a greater chance of not performing.
It’s possible the growth will not materialize or the growth is already reflected in stock valuation.
420 on the Black Market
There is currently a burgeoning black market for marijuana and other drugs in the U.S.
Long before legalization, people got their weed from the local dealer. They paid a premium because the weed was illegal.
Legal marijuana may be a better product, but it’s also taxed on the state and local levels. It’s the reason why states and cities get millions every year from marijuana sales. This makes the product more expensive than the street weed from local dealers.
Street level dealers don’t have to deal with taxes and distribution fees. They don’t have to worry about dispensary employees, licensing and other problems a legitimate business does.
Even with legalized marijuana, growth could slow due to the continued use of black market dealers.
Supply and Demand
Right now, the supply of marijuana is lower in comparison to the demand. As more farms and companies develop, the gap between supply and demand closes. This leads to a lower price for marijuana and a weed glut.
This would be several years down the line, but investors should keep an eye on prices and growth. Eventually, the stagnant or glutted market leads to a financial reckoning and a culling of once-profitable marijuana companies.
I’m Interested, Now What?
You understand the benefits and risks of investing in marijuana, so you’re ready to know how to invest in marijuana stocks.
First, you need to choose the industries you’re interested in. You’ll then talk with a financial advisor on what stocks are available, their prices and how much you want to invest. The key to a sound and profitable investment is research and vigilance.
Research the companies and continue to watch your investments. Keep a close eye on industry trends and marijuana legalization.
Risk Versus Reward
There is some risk in investing in marijuana. Is the risk of slow market growth or legalization issues worth the potential reward of high profits? As with any investment portfolio, stock diversity can help decrease the risk factor.
As of now, marijuana seems like a sound investment with high levels of projected growth. Legalization in the United States is on track, but keep an eye on the future. If you’re worried, then you can sell the stocks.
If you’re interested in learning more about investing or the marijuana business, then explore our site.