One of the more surprising trends in the investing world that’s come along in the last few years is the rise of marijuana stocks. With the legality of both medicinal and recreational becoming more widespread, it has become possible for these marijuana-based companies to join various stock exchanges.
Some of them are actual producers of marijuana, some are companies dedicated to research and there’s a couple of other variants in there too that you can invest in. Because it’s such a new thing, you shouldn’t jump to invest in it straight away. There’s a lot to think about before hand.
Here’s 5 things that you should know about before you make the decision to invest:
1. The Company’s Cost of Growing
If the company that you are investing in is one of the ones that are actually producing the stuff, you should know how much that process is costing them. Right now, most of the companies are just getting started and people are probably investing more because of the projected boom of the industry than because of the company’s quality. You don’t really know if this is going to be a company that you will get long-term returns from if you invest in them.
You can make an educated guess on that however if you find out how much they are spending to grow their product. You need to find out the cost-per-gram metric and then also find out how much they are actually selling and if they’re making a significant profit on that. If this information is not available to you, then the company may have something to hide and you should probably avoid them.
2. Supply Agreements
This is probably good advice when it comes to any company that you want to invest in, but it’s especially important for these marijuana companies. Right now, the legality of the industry still varies from place to place, and so you should only invest in companies that the relevant supply agreements.
Because of the widespread legalization of marijuana across Canada, it might be a good plan to limit your pot investments to Canadian companies. A lot of them are on the the bigger exchanges such as the NASDAQ and the NYSE and they all have to be regulated by Health Canada.
If the company you’re eyeing isn’t, then it’s a company that may get shut down at some point. You don’t want to invest in something only for it to go under shortly afterwards. Each province has its own rules but you can find out on the province websites about what agreements a company must have.
3. The Frequency of OTC Stocks
What is an OTC stock? Well, the OTC stands for over-the-counter and these are also sometimes referred to as ‘Penny Stocks’. This is because the shares tend to come pretty cheap which makes them enticing for people looking for what appears to be a low-risk investment. The truth is though, lower cost is not synonymous with low risk at all. In fact the se OTC stocks are among the riskiest ones out there. And unfortunately, because of marijuana’s lack of legal consistency, a lot of the stocks come in this form.
I know I’ve harped on how marijuana isn’t legal everywhere yet a couple of times already, but it is extremely important because you’re giving the companies your money. This isn’t necessarily to say that you should absolutely avoid OTC stocks, but don’t just throw your money at them because you see a low price.
Do as much research as you can and find out about their management and supply agreements. You’ll have to do this a lot for marijuana stocks but it’s worth it.
4. There’s a Risk it Won’t Grow
I’m not saying there’s a risk that the marijuana itself won’t grow (although there might be), but there’s quite a few reasons why the industry won’t grow.
One of those risks has to do with commoditization. Something that is considered to be a commodity is something that has a higher supply than a demand. The majority of agricultural crops are like this as are things like natural oil and gas. Marijuana is essentially an agricultural crop in itself.
The more of it that there is, the more it’s going to be commoditized. It will become increasingly difficult for companies to raise their prices without lowering the demand.
Once this happens, the market will probably remain pretty stagnant which kind of makes it a pointless investment.
This is a very real possibility that you should be aware of before deciding to invest.
5. Who are the Recommended Companies
As we mentioned earlier, there is a lot of Canadian companies out there right now that would be worthwhile investments. Canopy Growth would be a great choice. It’s one of the leading producers in the country and has the name recognition of being associated with Snoop Dogg.
Aurora is another top choice. A huge producer in its own right and also sells cannabis oil as well as dry cannabis. These would be great ones to start with and have promising futures. If you want to get a sense of some more options, check out this great guide from Sure Dividend.
So with all of that in mind, if you still think that this would be something that you want to invest in then by all means go ahead. It’s impossible to tell the future, but it’s something that if you invest in it right now and it does boom over the next few years, you could make serious long-term returns.