Introduction to investing in cannabis stocks

Cannabis Stocks are highly volatile but can yield high returns from the 'Green Rush'

With recreational cannabis now legal in 10 U.S. states and the District of Columbia, and medical cannabis legal in 33, federal legalization in America seems inevitable. As the stigma of cannabis use fades, more and more Americans are becoming interested in investing in marijuana stocks. This includes people, many of them young, who have never invested in the stock market before.

“What I really wanted was a share of the dispensary in the town nearby,” says Jason Murphy, a college professor and first-time investor from Massachusetts.

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“The lines were extremely long, but you could see that people were excited to be there. The operation seemed very professional and the employees seemed cheerful if a bit rushed. They reminded me of micro-brewers and whiskey aficionados, who just want to be in the room where this is going on.”

Murphy teaches at a small college, and his employer uses the Teachers Insurance and Annuity Association (TIAA), the leading financial-services provider for academic institutions. He opened a brokerage account through them, then, he says, and searched their database for “cannabis,” “marijuana,” and “ETF.” An ETF, or exchange-traded fund, says Murphy, “buys a bunch of different stocks, so you have less risk. I felt like buying [an ETF] was a way to be part of something people are excited about.”

How to choose a cannabis stock to invest in

When choosing a cannabis stock in which to invest, the first step is to educate yourself about the difference between medical and recreational marijuana. One immensely popular medical-marijuana product is cannabidiol (CBD); with the passing of the 2018 Farm Bill, CBD is now federally legal, and states can now choose to legalize its cultivation and production within their boundaries. However, you might also choose to invest in a company that makes edibles, or sets up grow rooms, or manufactures vaporizers. You might choose to invest in a cannabis consulting business; the more the industry grows, the more people want to know how to get into it, and the more work there is for consultants. Learn about different product lines, growing systems, paraphernalia technology – anything that might lead you to learning about a new and promising company.

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Private Placements can be especially appealing if you can find them

Privately held companies sometimes raise money by selling shares through a private offering,or private placement, which is different from investing in the stock market. These deals are harder to find (look for companies with private placement offers that spell out all the details), and the stock is often bound in complex shareholder agreements that limit their tradability.

Stocks or ETF?

In order to buy stock in a publicly traded company, it must be listed on a trading exchange like NASDAQ or OTC, which allows the general public to invest. The other option is to choose an ETF, in which cannabis stocks are part of a fund that has bundled together ownership of various stocks, and then trades these on an exchange such as the New York Stock Exchange. Investing in an ETF means buying a small chunk of each company in a bundle, thus diversifying your portfolio. (Murphy was surprised to find that Scotts Miracle-Gro was part of almost every cannabis-related ETF he considered; Scotts recently acquired Sunlight Supply, Inc., the nation’s largest hydroponic supplier.)

“Probably EFT is the safest and most diversified,” says Jeff Ricci*, a longtime investor in New York. “Investing in cannabis is a high-risk, high-reward game. If a company takes off, you stand to make lots of money. However, because cannabis is still federally illegal, the risks are obvious. Cannabis rewards are very high, but you’ll have to be able to take the pain to reap them.”

Cannabis stocks are considered High Risk

By “the pain,” he means federal prohibition; at any time, the government could shut a cannabis company down. “It’s doubtful, though,” says Ricci, pointing out that the FDA has already approved a pharmaceutical drug made from cannabis, GW Pharmaceuticals’ Epidiolex. “There’s a lot of money to be made in this young industry. Once [prohibition] ends and institutional investors get into the game, fasten your seatbelts.”

Murphy suggests that purchasing cannabis stock is a socially responsible thing to do, saying “Cannabis is an ethical investment, because it will reduce problems caused by alcohol and opiates.” Investing in cannabis also allows you to contribute to the creation of jobs for people traditionally oppressed by prohibition, such as African-American and Latino men.

If you want to put your money where your social conscience is, and perhaps make more money in the process, investing in cannabis stock is a promising way to do so. If you’re part of a credit union, ask about investing even through them. If not, download a few brokerage apps and see what they have to offer. The more money there is to be made, the more likely the U.S. government will legalize, and the more likely investors are to see big returns on their investments.

*a pseudonym