How To Invest In Cannabis Stocks
A Guide To Investing In The Cannabis Industry
As the cannabis industry is on the brink of an explosion across the globe, there is no better time to look to enter this accelerating market. Here is a step-by-step guide on how to invest in cannabis stocks.
How To Invest In Cannabis Stocks - Beginner’s Guide 2021
If you take a look at where the marijuana industry was sitting ten years ago to where the industry sits today, the industry looks almost unrecognisable.
Within the U.S and worldwide the cannabis industry has moved forward exceptionally from its black market days. The cannabis industry now is a billion-dollar industry that many investors are setting their sights on as it is set to continue to push down further barriers within the U.S over the coming months, and no doubt this industry will continue to knock at more doors worldwide as the years unfold.
The cannabis industry is not just all made up of marijuana companies of some form, it is also disrupting other leading industries including healthcare, beauty, pharmaceutical sectors and many more. All adding to this industry’s forecast total net worth of over $200 billion globally by 2030.
The first cannabis stock to hit a mainstream market was Cronos Group (CRON) in 2018 when it made its appearance on the leading Nasdaq exchange. Since then the cannabis industry is still going through its on-going global event known commonly across the world as ‘green rush’ within the U.S and Canadian markets.
The green rush event is a name given to express the immense growth within the industry from all cannabis-related products to other cannabis-related things outside of the marijuana world including stocks, bonds and more. Whilst obtaining an extensive show of media and investor attention on this accelerating industry.
But it has not all been singing and dancing for this industry since 2012.
From 2019 to the start of 2020 the cannabis industry witnessed a downward spiral causing many investors to lose interest in the growing market. There were many factors that played a part including cannabis companies placing high hopes for demand but instead waited too long to grow their capacity, high taxes within the U.S also played a major role and one of the last reasons, ultimately the main reason as to why many investors turned away from this industry was the regulatory and accounting factors within that period.
On the back of these factors caused cannabis stocks to decline in valuation hugely following on from their highs over previous years. As investors walked away from these stocks, it left all or if not most cannabis stocks to make substantial reductions in order to generate the interest back into the industry but with stronger challenges to face.
But welcome the start of 2020. After the news of the pandemic became widespread and placed a halt on the globe, this industry showed just how resilient it was.
Cannabis stocks increased significantly in 2020 as the demand was strong causing sales across all cannabis products to reach new highs. The medical marijuana market remains strong despite the Covid-19 disruption and was further supported by medical professionals across the world as cannabis is used to help with the treatment of certain illnesses. Lastly, strong political changes had a huge effect on the industry. As President Joe Biden is now at the helm of the United States, who backs the legalisation of cannabis usage in all forms, adding to further push this industry to where it is anticipated to reach within the coming years.
Wall Street analysts are now also being extremely optimistic on this industry with some analysts predicting that the U.S cannabis market could rise by 80% leading to 2030.
As more light continues to shine on the cannabis industry with more U.S states confirming legalisation, many investors now understand clearly what this industry entails and the strong positives that cannabis products and services bring to the world.
With both strong government backing within the U.S, alongside strong medical and general public backing, there is not much more that needs to be said to confirm which way this industry is going.
If entering the cannabis market is your aim for 2021, take a look at Best Marijuana Penny Stocks Right Now here you will find 7 of the best cannabis penny stocks that are positioned well anticipated for stronger growth looking ahead along with offering great value.
How To Choose The Best Cannabis Stocks
Whilst looking at a cannabis stocks fundamental analysis is key, here are a few additional strong points to consider when looking at the best cannabis stocks to invest in.
1. Look for long-term investments.
Although many cannabis stocks on the market can work well in terms of short-term trading, and are typically small-cap stocks that see most of this activity, these stocks might not offer the strong earnings potential that other cannabis stocks can offer in the long-term outlook.
This is why it is strongly advised to look at cannabis stocks with the long-term outlook in mind as these stocks are beneficial for an investor in many ways including archiving higher earnings over a period of time, holding a more stable position within the market and can hold less volatility.
The same can be said for all investments, but this industry is set to grow substantially over the coming years and with it being a fairly new industry compared to other industries, holding onto investments for over one year or more is the way forward for investors to see this industry's powerful potential as it evolves.
Then take into consideration companies that have now partnered up with this leading industry as these companies are adding to their already existing revenue, inevitably will be looking to increase shareholders profits.
Having said that, it is strongly advised to have a mix of all, mid-large cap cannabis stocks and smaller cannabis stocks within your collection. This will add diversity to your portfolio along with potentially benefiting from stronger earnings if these stocks perform well.
Here are two cannabis stocks that fit the above criteria perfectly:
Cresco Labs Inc (CRLBF) - Market Cap: $4.65b
KushCo Holdings Inc (KSHB) - Market Cap: $204.92m
2. Strongly consider investing in subsidiary cannabis stocks.
Investing solely into cannabis stocks might seem to be risky for some beginner investors but as previously mentioned choosing to invest in a subsidiary cannabis stock is the perfect go-to option in this case.
These companies tend to be large-cap stocks that are excelling within their field yet have involvement with the cannabis industry indirectly to help strengthen both company’s products and services along with their portfolios, balance sheets and more.
These stocks also tend to be less volatile than of singular cannabis stocks. A brilliant subsidiary cannabis stock to consider right now is AbbVie Inc (ABBV).
Although typically ABBV is not a cannabis stock it is a well-known U.S pharmaceutical large-cap company but it did make its way into the green-friendly industry previously with its product Marinol, which has since been acquired by Alkem Labs in 2019.
Nonetheless, the stock held the top spot in 2019 with 59 patents confirming that the company sees the benefits medical marijuana brings to both products and patients and is still adapted into the cannabis industry today.
3. Consider an ETF of marijuana stocks.
Marijuana ETFs are a fantastic way of adding cannabis stocks to your portfolio whilst diversifying your risks. These ETFs work in the same way as basic ETFs as they seek to expose investors to equities of cannabis companies that engage in cannabis activity.
In simpler form, an ETF is a basket of securities that aims to track the performance of a specific index. As it stands there are currently 6 marijuana ETFs in the U.S and over the year have outperformed the broader U.S equity market by a substantiation amount. The three top cannabis ETFs in Q2 2021 are:
- Amplify Seymour Cannabis ETF (CNBS) - Performance over 1 year: 188.7% includes GW Pharmaceuticals PLC (GWPH), Aphria Inc (APHA) and Canopy Growth (CGC).
- AdvisorShares Pure Cannabis ETF (YOLO) - Performance over 1 year: 173.7% includes Village farms International Inc (VFF), Innovative Industrial Properties Inc (IIPR) and GrowGeneration Corp (GRWG).
- Cannabis ETF (THCX) - Performance over 1 year: 118.1% includes Scotts Miracle-Gro Co (SMG), GrowGeneration Corp (GRWG) and Aphria Inc (APHA).
4. Consider U.S, Canadian and International cannabis stocks to invest in
As the U.S cannabis market is getting most of the attention recently, and rightly so, it is worth remembering that the European cannabis market is also a market to consider.
Although there are many European countries that have not legalised recreational use of marijuana, most have given the green light for medical use of the product. The European market is predicted to reach EUR 406 million by the end of 2021, a year-over-year growth of 75% from 2019.
Germany is Europe’s number one player within the cannabis medical field who owns half of the European market and by 2024 it is estimated that Germany alone will be worth over EUR 840 million. By 2025 it has been forecast that most European countries and the UK will be showing a significant rise in medical marijuana usage, edging closer for this market to potentially become just as big as the U.S and Canadian markets further down the line.
How To Pull Out The Bad Marijuana Stocks
Whilst looking out for the best cannabis stock to invest in, you will more than likely come across the marijuana stocks that are not sitting in a good spot right now. However, when looking to invest in cannabis stocks it can take up a lot of time and effort to go through each company’s filings and resources, and in reality many investors do not have such luxuries.
Yes, you could scan a cannabis stock and get a gist of a cannabis stocks potential without doing such thorough research and it may pull off well. But you would need to highlight and look at the risk factors carefully along with looking at other essential features that are involved in those stocks before jumping to invest.
Some key warning signs to consider to determine if a cannabis stock is a bad stock to invest in:
- No growth signs, no investing. If the growth potential isn't there for a stock this is a clear red flag warning sign not to invest in that particular company. This does not mean to say that the company can’t change down the line and become a positive stock, it most certainly can. But the company will have to undergo a strong strategic or management shift in order to get there and this is a big risk factor when starting out in your trading journey.
- Dilution. To explain this in simple form, if a cannabis stock has not reached profitability the company then has two main avenues to go down either selling equity in the business or taking out loans to help the company move forward. If the company does decide to sell equity within the business, this will then cut everyone who is involved with this stock piece of the pie smaller which is what is meant by ‘Dilution’. This is a clear feature to look out for when looking into a stock of interest and is a strong avoid.
- Burn rate. The last key feature to look out for is how much time and cash a company has in order to grow and keep operations moving before time runs out. This is commonly known as ‘runway’ in startup terms. For example, if a stocks net burn rate is $20,000 per month and has $200,000 in their bank then the company has 10 months in order to gain a positive cash flow before running into debt. If a stock does not succeed and sits in debt, unless it's achievable to come out of, this is a clear warning sign of a stock not to invest in.
As mentioned cannabis ETFs are one of the safest forms of investing. These instruments have been hand picked and are passively managed by a portfolio manager whilst they track certain indexes.
Not only are ETFs the safest, they are also the easiest to invest in for investors. This is because they have been hand picked confirming that these chosen stocks are not bad performing cannabis stocks, as it can be challenging to determine if a cannabis stock is in a bad spot due one factor being lack of information.
Over-The-Counter (OTC) And Mainstream Cannabis Stocks
While many U.S states are pushing to get marijuana legalised for both recreational and medical use, marijuana is still illegal at the federal level today. But it could look to become federally legal in 2021 as the U.S seeks approval from more states over the course of the year.
Due to this being the case, this is why many cannabis companies and cannabis entrepreneurs are up against many steep challenges.
From obtaining financial backing to start businesses to causing many challenges for cannabis companies to be listed on mainstream exchanges such as NYSE, Nasdaq and more. This is why you will mostly find the majority of cannabis stocks trading on over-the-counter markets across both the U.S and on OTC markets in Canada.
Be mindful, just because cannabis stocks are trading on OTC markets it does not mean to say that these cannabis stocks are bad stocks to invest in. As mentioned it could just be that the challenges to enter a mainstream exchange may just be too much to handle for these cannabis companies.
However, typically OTC cannabis stocks are known to hold stronger risk factors than mainstream cannabis stocks due to various reasons including lack of public and reliable information and shares often being traded thinly meaning that a stock would have to double in order for an investor to break even.
How To Invest In Cannabis Stocks
Now we have taken a look into some of the standout features of what to look for and look out for in a cannabis stock, now it's time to take a look at how to get yourself prepared and set up to invest within this blossoming industry.
Before we go on, keep the option of investing in cannabis ETFs a strong consideration within your investing plans. These investments are strongly advised for both beginner and experienced investors as they act as a good safety net within your collection of stocks, adding diversity to your portfolio along with bringing in more stable earnings.
Step 1: Determine your investing goal and your financial capabilities.
As a beginner and as an experienced investor, one of the first points to start with is to determine what your investing goals are and if they are achievable when taking into account your financial situation.
Before beginning your trading journey it is wise to create a budget plan and to be able to separate your personal liabilities to your available investing finances.
This will help you determine how much you can seek to invest in a stock or stocks of interest, it will give you a clear understanding of how much you have to be able to re-invest into your chosen stocks whenever needed, along with determining if you are in a position to be able to begin your trading journey.
It is strongly advised to set up a separate trading account from your personal bank account so you know exactly what is happening at all times whilst it is easier to manage.
The last point to mention is to always invest within your financial means, as the sooner you can place money into an investment the quicker you can lose money if it is not invested wisely.
Check Out: Best Long-Term Investments
Step 2: Knowledge is power.
When looking to purchase or invest in anything, you should always know the ins and outs before you make the jump to commit yourself. Investing in stocks is no different, in fact, it is a MUST.
One of the first steps after determining your financial status and investing goals is to then look at researching your cannabis stock or stocks of interest. This as mentioned can be time-consuming but it is a must in order to pick out the best cannabis stocks on the market that are going to give you the earnings potential that you are aiming for.
There are many forms or ways you can seek to look into a stock to determine if it is a good investment.
You can do this by looking at various features which include SEC filings which is a financial statement submitted to the U.S Securities and Exchange Commission, you can check SEDAR an electronic filing system that discloses documents for issuers in the Canadian market, checking mainstream exchange websites including the leading Nasdaq exchange and more exchanges where cannabis stocks publicly trade and lastly, keeping a close eye on financial news websites such as Yahoo Finance, CNN, Bloomberg that can give you an up to date report or news events on certain stocks of interest.
Step 3: Have a timeline.
The third step could come into play at the beginning of the process, but as you start to look into various stocks and understand more what is entailed you may wish to amend or get a clearer understanding of a timeline you have in mind to keep invested within your chosen stocks.
For example, you may wish to set yourself a limit on your stocks, say if a stock falls below a certain price or goes above a certain price you may wish to sell these stocks.
Additionally, you may decide that after a certain time period you wish to sell your chosen stocks and refresh your portfolio. This is strongly advised after a certain amount of time to keep risk elements lower, add more diversity to your collection whilst seeking to add further gains.
Step 4: Choose a broker.
Now we have determined all of the essential parts of the process for beginning your journey into investing in cannabis stocks, now it is time to pick a broker to make your dream of investing become a reality.
As the world has adapted and moved heavily into the digital world, so too has the world of investing. There are many online trading platforms to obtain a broker to begin your trading journey with, that all offer their own advantages and benefits to investors with all offering the ease of being able to invest at a click of a button anytime, anyplace and anywhere in the world.
Researching and choosing a broker can be as time-consuming as looking into a stock of interest, so to help you manage your time effectively we highly recommended the leading online trading platform eToro.
This leading social online trading platform offers it all and more under one roof, all with the added benefits of offering zero commission fees, a wide range of investments to invest in, access to international markets and much more.
To open a trading account with eToro is straightforward, simple and within minutes you will have an account and a broker ready to begin your journey into stock trading. Along with having all the help and support needed and amples of educational material on hand in order to help you to succeed within the world of investing.
There truly is no other platform as unique, that offers great exposure into various markets and investments, time-efficient, friendly and easy to operate.
Step 5: Buy a cannabis stock.
Now you have a broker on hand it is time to start investing in your chosen cannabis stocks.
This part of the process all comes down to when you are ready and when you have carried out all of the necessary research on your stocks of interest. Remember there is no time limit that you have to achieve and you have to make sure that the stocks you have picked are right for you.
You will find that there are typically two popular forms of ‘buy’ orders that are available: market orders and limit orders. Before you get to this point it is worth noting the difference between the two.
A market order is when an investor may wish to execute a purchase at the current market price or obtain the first rate when the market opens. This can be actioned on a weekend, on an evening when the market is closed or during daily market breaks. A limit order will only execute at its limit price or a lower price. This stipulation is designed for investors to help take stronger control of the prices that they wish to trade.
Step 6: Holding a cannabis stock.
Once you have bought cannabis stocks and if your strategy is to hold them for the foreseeable, then this step is simple and easy. All you have to do is leave the investment ticking over.
There is nothing that holding a stock requires an investor to do, unless you may wish to check in on the stock from time to time to see how it is progressing.
Step 7: Sell a cannabis stock.
The last point to come on the step-by-step guide is the selling of a cannabis stock.
Unless your plan is to buy a stock and hold it for a lifetime, you are at some point going to be looking to sell the stock.
If you feel as though a stock is not delivering as well as you had hoped, maybe you feel that you have generated enough returns from a stock, or simply you just want to refresh your collection whatever the reason this process is just as simple as buying a stock.
Similar to buying a stock you can use both stipulations, market order and limit order to sell your stock but with the benefit of having its current limit price or a higher one.
Then it is entirely your choice whether you wish to use the proceeds to reinvest or use as you wish. But a strong recommendation is that investing is a great way to set yourself up for retirement, and as the saying goes investing never goes out of style.
3 Top Marijuana Stocks To Consider To Buy in 2021
Before you get ready to press the green lights to begin investing within the cannabis industry, here are 3 cannabis stocks that we highly recommended for investors to consider or seek to invest in for April 2021.
Cresco Labs (CRLBF)
One of the largest cannabis stocks on the market today is Cresco Labs Inc (CRLBF).
Cresco Labs is currently pushing its way across all legalised states within the U.S and is one of 10 companies that is operating in the state of New York that has recently been given the green light. The stock is looking to continue its strong sales growth and is looking to continue to quadruple quarterly revenue as the stock achieved a revenue of $162.3 million in company’s Q4 2020 results.
Scotts Miracle-Gro (SMG)
Scotts Miracle-Gro may be a company known to many across the globe for specialising in gardening products but this stock offers much more.
Scotts Miracle-Gro's products have become an essential key player for cannabis growers across the globe leading SMG stock to become a big contender within this growing industry. SMG has predicted its Hawthorne growth revenue to hit almost 30% in 2021 making this cannabis stock one to watch out for.
KushCo Holdings Inc (KSHB)
This small-cap cannabis stock is looking like a rather attractive stock to look to buy in 2021.
Although KushCo company is not the most well-known or the largest, it has very strong growth opportunities, especially after the stock recently announced its merger with Greenlane (GNLN). Providing a strong collection of cannabis-related products and services across the U.S and more, this cannabis stock is looking like it could outshine some of the leading cannabis players in 2021.
Overview: How To Invest In Cannabis Stocks
No matter if you are a beginner or an experienced investor, the cannabis industry is looking to be the ‘go-to’ industry in 2021 for many as is it set to explode. The industry’s potentials are endless and the success that this industry could achieve over the coming years is a dream that all investors dream of.
If you take on board, adapt and apply all of the steps advised within this guide along with choosing the best cannabis stocks that look set to offer great returns over the coming years, you are no doubt on your way to a successful trading journey.
But keep strongly in mind that just like other leading and new industries on the market today, the cannabis industry does come with strong risk factors that all investors must take into consideration before investing.
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