Step-by-Step Guide on How to Invest in Marijuana Stocks

How to Invest in Marijuana Stocks

The legal marijuana industry is one of the most followed sectors on Wall Street, and those who have been closely watching pot stocks know that it can be a roller-coaster ride. Still, there are a lot of excellent large and small cannabis stocks that continue to perform well.

To find these good-performing stocks, you need to know how to separate the great weed stocks from the chaff. It’s not as easy as it sounds.

The marijuana stock market remains hot, but there are risks, just like with any other sector. To help reduce your risk and increase your reward, below are some tips on investing in marijuana stocks.

Step-by-Step Guide to Marijuana Investing

To start, here are four steps that investors should take when investing in marijuana stocks.

1. Research the Company

When it comes to pot stocks, definitely research the company. Since it’s your money, it’s better to take responsibility for your own decisions as opposed to depending on the talking heads on TV or friends who may not fully understand the market.

There are two main approaches you can take when researching a marijuana company: fundamental and technical.

Investors who use fundamental analysis look at the company’s fundamentals—i.e. financial information like quarterly results, balance sheets, and income statements—to predict trends.

Investors who approach cannabis stocks from a technical angle believe that stock-price chart patterns and past price performance can help predict where share prices will go in the future.

2. Decide How Much You Want to Invest

Savvy investors know that they should never part with more money than they can afford to lose. Many good investors have seen their portfolios suffer because they invested more than they should have.

Stocks in general can be volatile, and startup industries like legal marijuana are susceptible to growing pains. As a result, it can be difficult to pick the winners when an industry is young.

3. Identify Your Investing Timeline

Investors need to decide on their investing timeline Is it days or years down the road? Each timeline has a different risk threshold, which will have an impact on when the investor should buy and sell.

Buy-and-hold traders take a long-term perspective to marijuana investing, so short-term fluctuations won’t matter to them. Instead, they focus on long-term capital appreciation (five years, 10 years, 15 years, or longer).

Therefore, they will adhere to a fundamental approach to their research.

If you are a long-term investor, chances are most of your marijuana stock portfolio will be made up of major players and/or marijuana-related exchange-traded funds (ETFs) like the Horizons Marijuana Life Sciences Index ETF (OTCMKTS:HMLSF, TSE:HMMJ) or the ETFMG Alternative Harvest ETF (NYSEARCA:MJ).

Even if you don’t invest in ETFs, researching them will show you what marijuana stocks they deem worthy enough to be in their portfolios.

Day trading weed stocks is not for the faint of heart. Instead of focusing on long-term appreciation, day traders take advantage of short-term price fluctuations. Short-term investors may buy and sell a stock several times each day.

Short-term marijuana investors are technical traders. They may not even care what exactly a company does; their focus is on chart patterns, volume, stock price performance, and daily news.

4. Buy Low, Sell High

Yes, buying low and selling high is the always the goal. To get there though, investors need to know the basics on how to buy and sell marijuana stocks.

There are two types of “buy” orders: limit order and market order. Knowing the difference could save you a lot of money.

With a market order, you acquire a stock at the current market price.

With a limit order, you buy a stock when the price falls to (or below) the limit price you have set. Because of the set limit price, there’s no guarantee that you’ll be able to acquire the equity you have set your sights on.

Types of Cannabis Stocks

There’s more than one way to invest in marijuana. Investing in marijuana growers and retailers is the most obvious way, but there are numerous other companies that operate under the marijuana-industry umbrella.

Recreational weed companies are the ones that grow, harvest, and distribute recreational pot to consumers.

Most marijuana companies started out selling medical marijuana, simply because that was what was legal at the time. Since recreational marijuana became legal in Canada on October 17, 2018, most medical marijuana companies have branched out into the lucrative world of recreational pot.

There are many companies that provide services or support to marijuana producers at various levels, such as with hydroponics, extraction processing, branding, e-commerce, financing, real estate, or operating dispensaries.

U.S. vs. Canadian Marijuana Stocks

Canada is currently the land of legal pot, but the U.S. is where the market potential is. That’s mostly because Canada has a population that’s less than that of California.

Canadian marijuana companies are focused on the Canadian market and on international expansion—mostly in Europe, Central America, South America, and Australia.

Some Canadian marijuana companies are also preparing for the eventuality of weed becoming federally legal in the United States. But because of the current U.S. federal laws, they are not as aggressive as they are with other international markets.

There are only a few American-based legal marijuana companies operating in the U.S. right now. They may be small compared to their Canadian counterparts, but with more states legalizing medical and recreational marijuana, the potential for massive profits is huge.

Since marijuana is illegal in the U.S. at the federal level, it’s very difficult for marijuana companies to get listed on U.S. stock exchanges like the New York Stock Exchange (NYSE) or Nasdaq. But they do exist. And more Canadian-listed marijuana companies have plans to also get listed on the Nasdaq and NYSE.

Over-the-Counter Markets

Most marijuana stocks trade on the Toronto Stock Exchange (TSE), the Toronto Venture Exchange (TSX-V), or the Canadian Securities Exchange (CSE).

That’s because medical marijuana has been legal in Canada since 2001. As a result, Canadian marijuana companies have had almost 20 years to build their infrastructures, expand their revenue streams, develop partnerships, etc.

Many Canadian pot stocks also trade in the U.S. in the over-the-counter markets (OTCMKTS). Some American investors shun OTCMKTS stocks because the companies that list there do not face the same kind of scrutiny that equities listed on the NYSE or Nasdaq do.

Having said that, OTCMKTS cannabis stocks that also trade on Canadian exchanges are heavily scrutinized there. So there’s no reason to ignore OTCMKTS that are also trading on Canadian exchanges.

You can find lots of information about the companies’ financials on their corporate web sites, as well as on the TSE and CSE web sites.

When to Buy Pot Stocks

Despite the thrill of it all, most investors should take a long-term view of weed stocks. While this generally means not necessarily caring about sort-term price fluctuations, when you buy a marijuana stock is just as important as when you sell.

In the summer of 2018, virtually every marijuana stock was soaring. For much of 2019, they were flat or falling.

It could be a totally different story in 2020. Some analysts have even called a bottom for Canada’s cannabis sector, with one analyst saying, “concerns hanging over the marijuana sector are priced in and overdone.” (Source: “‘We are calling the bottom’: Analyst sees brighter outlook for pot stocks,” Bloomberg, November 5, 2019.)

Why the bullish turn for cannabis stocks?

In Canada, recreational cannabis sales have been rising, the number of legal retail stores has been increasing, cannabis-infused products (edibles, vapes, etc.) have been rolling out, and sector consolidation has been progressing.

Fortunately, due to the strong potential of the pot industry, it’s not too late to get into marijuana stocks. That said, it’s important to monitor any pot stocks or ETFs you are considering and pay close attention to marijuana industry news.

When to Sell Pot Stocks

It’s impossible to time the market, especially in emerging sectors like legal marijuana.

Inexperienced investors aren’t generally as patient as seasoned investors, and they can easily get sucked in or spooked by corporate press releases. This could result in buying and selling at the wrong time.

When it comes to marijuana stocks, whether they’re the big players or more speculative in nature, investors have to figure out their own risk/reward threshold.

Pot investors should also ignore the noise on the street. As mentioned before, it’s imperative that they do their own research.

Legal Risks

Because recreational marijuana is still illegal federally in the U.S., there are legal risks to investing in marijuana stocks.

Even though several states have legalized marijuana in one form or another, technically the federal government could step in and shut those operations down.

Fortunately, President Donald Trump has said he backs states’ rights to make up their own minds when it comes to marijuana. On the other hand, Trump has never said he wants to legalize recreational marijuana at the federal level.

Therefore, until the U.S. legalizes marijuana at the federal level, there will always be legal risks associated with marijuana companies.