Marijuana Stocks
Overview
Recently, the legality of marijuana has become a hot topic within the United States. As more states have moved to legalize both medical and recreational marijuana use, investors have become more interested in purchasing marijuana stocks. Currently, there are many signs that point to future federal legalization within the United States; an action that could ultimately turn U.S. cannabis industries into global powerhouses. In fact, some estimations predict growth within the industry of up to $24 billion by 2025. Due to its supposed trajectory for success, investing in marijuana stocks has caught the eye of many long-term investors who seek to profit from the boom.
Marijuana Stocks
Sectors
There are three different sectors of the marijuana industry that investors can purchase stock from. The first is the growers and producers of marijuana. This sector consists of cultivation centers where marijuana is grown and produced. An investor can also purchase stock from drug makers, or pharmaceutical or biotech companies that utilize medical marijuana in prescription drugs. Lastly, an investor can purchase stock from service providers that sell marijuana-related products yet not actual marijuana itself.
Considering Marijuana Stocks
After deciding upon a sector or two, an investor can choose marijuana stocks the same way they would choose any other company’s stock: by doing research. When it comes to marijuana stocks, look for how the company differentiates itself from others. Due to the recent legalization of marijuana in large states such as Colorado and California, many companies have arisen to join the boom. With so many options, it is important to locate a company that is unique, has ample experience, and has a long-term growth strategy. Furthermore, it is important to consider what geographic markets the company is attempting to target. Some companies target nearby spaces where marijuana is legal; other companies aim overseas.
How to Invest in Marijuana Stocks
Unlike Canada where marijuana has been legalized, it is a little bit more tricky for investors in the United States to purchase marijuana stocks. Some large marijuana companies, mainly pharmaceutical companies, are listed on large exchanges such as the NASDAQ and NYSE. However, today most marijuana stocks sell over the counter (OTC) through a broker or online advisor. Additionally, an investor can invest in marijuana companies through purchasing ETF’s. ETF’s that focus on marijuana provide diversification and track underlying indexes of marijuana-related sectors.
Risks
Legalization
Recreational marijuana has been legalized in 11 U.S. states. In 33 states, bills have been passed to allow for medical marijuana use. While legalization is spreading throughout the country, the idea of federal legalization has become a political issue and seems somewhat difficult to achieve. Though the signs point to eventual federal legalization, it cannot be guaranteed. Without federal legalization, marijuana companies will almost certainly encounter different sets of regulations that can harm their growth.
Crowded Field
The same way investors have been running towards profits as legalization spreads, many entrepreneurs have been starting up companies to capture gains. This means that the marijuana industry is currently quite crowded and not every company will survive the potential future boom. Due to the nature of marijuana stocks, most companies are still developing, young entities. As such, in a market where each company is competing for dominance, not every company will have the means to succeed.
How to Combat Risks
Marijuana stocks have proven to be quite volatile. Therefore, if contemplating entering the market, an investor should start small. One should be prepared for their investments to fluctuate dramatically as the industry attempts to find its place within the economy. As long as an investor is comfortable with the amount of money they invest, the fluctuations will not feel overly terrifying. Additionally, if the fund ends up performing well, the investor can also purchase more of the company’s stock.
If an investor enjoys the buy-and-hold strategy, marijuana-related ETF’s might be for them. With intrinsic diversification and underlying indices, there is a greater chance for long-term profits even if some companies fail. Nevertheless, purchasing individual stocks may lead to higher returns than ETF’s. As previously mentioned, investors who desire to purchase an individual stock must take part in thorough research that examines the past, present, and future of the company.
Conclusion
While marijuana stocks are increasing in popularity, it is important for investors to examine them critically. Marijuana is still federally illegal within the United States, and as such, marijuana stocks can be quite risky. On the other hand, many investors have noticed a large opportunity within the market; marijuana stocks could be some of the most profitable stocks out there for those who are willing to take the risk. The success of the marijuana market is unpredictable; consequently, the market can be difficult for investors to navigate and understand. Before jumping into marijuana stocks, make sure to complete thorough research and/or consult an advisor.
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