Investing in Marijuana Stocks? Don’t Let Your Money Go Up In Smoke

Throughout 2018 we will be featuring women entrepreneurs, writers, artists, and personalities who are changing the face and tone of the typically male-dominated cannabis industry. Today we’re featuring our newest contributor Michelle Custodio, who shows us how not to get burned in the highly speculative pot stock market. 

 

Recently, there has been a massive surge in the amount of money flowing into the legal cannabis industry. In fact, one research firm claims that more than $3.2 billion was put into the segment in 2017, compared to $1.1 billion that entered the industry in 2016. In spite of the many risks involved in this nascent industry, market watchers insist that there are definite signs that 2018 will see much more investment in cannabis stocks.

Much of this is linked to new legislation on the drug, with adult recreational cannabis use made legal in California – one of the biggest marijuana markets – at the beginning of the year. The drug is also legal in Vermont, with New Jersey – with the potential for a billion dollars a year in cannabis revenues – set to follow suit.

Analysts estimate that the market in California alone should generate in excess of $5 billion each year, regardless of the presence of major challenges that include tax restrictions and access to banking for entrepreneurs in the industry.

It must be said that the legal cannabis industry is still far from mature, though the demand for the drug is very much established and is quickly expanding. This means that there are ample opportunities for investors in this market to realize handsome returns on their investments. So, how do you invest in marijuana stocks without getting burned?

Understand the Stock Opportunities Available

If you had asked most investment gurus about the viability of publicly traded marijuana-based equities a mere 18 months ago, you would have been told that they are complete scams that you should avoid at all costs. While this may be true for many marijuana stocks currently available, the growth and development in the industry means that there are now several legitimate businesses that offer attractive investment options.

Specifically, there are a number of Canadian companies involved in the business that are producing and distributing marijuana legally and on a massive scale. In addition, there are biotech companies which are hard at work developing, testing, patenting and marketing pharmaceuticals derived from cannabis.

Unless you understand the cannabis business intimately and have extensive experience in day trading, you need to think very carefully about buying OTC marijuana stocks. There are many hustlers in the industry looking to defraud unwary investors.

Seek Out Investments with a Proven Track Record

A major challenge, when it comes to investing in marijuana stocks, is the huge number of new companies in this niche which have little to no prior experience in the industry. While this is only natural for a new market segment, it presents a challenging environment if you want to employ due diligence or traditional basic investment principles.

Although it is tempting to seek out smaller ‘unicorn’ marijuana companies, which claim that they will soon be a dominant force in the industry, your best bet is to identify established firms which come with a long track record of success. In a rapidly growing, new and exciting industry like the legal marijuana business, it is easy to talk big, but the reality is that the underlying principles are the same as in any other industry; the companies that succeed are those that are able to handle the mundane aspects of running a business such as establishing supply chains, marketing the product and distribution, among others.

Invest In Stocks of Companies with Steady Revenues

With the expansion of cannabis trade, it is inevitable that there will be an extensive market disruption in marijuana stocks as more customers come on board and patterns of consumption start to emerge. As with any other new and exciting industry, customers will move from one company or product to another with each new flavor and fad that arises. However, this activity will eventually fade, with the companies that survive being those that can consistently offer high-quality products.

When it comes to choosing the best marijuana companies to invest in, avoid stocks of companies which only experience profits in short bursts. Although a company may offer customers the hottest product of the day, you are not guaranteed that when the next big thing comes along, the public will even know their name anymore. Instead, try to find the stocks of companies that already have an established revenue stream, as they are the companies in pole position to profit from the marijuana trade in the long run.

Be Wary Of Pump and Dumps

Because of all the hype and excitement which currently surrounds marijuana stocks and the industry in general, there should be little surprise at the emergence of many unscrupulous traders who operate pump and dump schemes based on unlisted stocks. Such traders will make large investments in a cheap, little-known stock, promote it extensively and sell off their stock when the price rises.

To avoid falling prey to such scams, always put your money in stocks which are listed on large, reputable exchanges, or those in large and reliable OTC markets. Always avoid pink-sheet stocks and instead, place your focus on listed stocks that have solid revenue streams and a proven record of profitability.

Final Thoughts

Many stock investors now recognize the enormous potential in putting their money into recreational and medicinal marijuana. However, the current market still has a ‘wild west’ feel, making it tough to determine the companies likely to prosper along with the growth of the industry. Investing in a new industry that is still very much in development can be stressful if an investor fails to take the right approach. If you follow the tips above, you can place yourself in a much better position to identify high-quality cannabis stocks, limit your risks and boost your chances of success.