Though cannabis is still illegal at the federal level, that doesn’t mean you can’t lawfully invest in the industry. Indeed, many US cannabis-related brands are now listed on the New York Stock Exchange, and Canadian cannabis brands are also selling shares on the Toronto Stock Exchange, with this summer marking the start of Canada’s legal recreational cannabis industry.
While you may be extremely knowledgeable about your cannabis community and about cultivation, you might feel less confident when it comes to investing in the stock market. There are many ways to quickly lose your money in an attempt to bankroll this burgeoning industry, so it’s best to initially play it safe. And yet, it’s difficult to even ascertain quite what playing it safe truly means.
One thing is for sure: Anyone who wants to be a serious investor in cannabis should get started as soon as possible. The value of cannabis companies is quietly and quickly increasing, with analytics firm New Frontier Data predicting recreational sales will hit $25 billion by 2025. For that reason, you’ll want to get in before those prices peak.
“Every year there are more companies with higher valuations, which generally means more investors and more money flowing in,” explains Jason Spatafora, cannabis investor and owner of marijuanastocks.com. “Revenue in the United States jumped 33 percent in the cannabis market in the last year.”
Is It Legal To Buy Cannabis Stocks?
Spatafora says many people have asked him if it’s legal to buy cannabis stocks, to which he replies, “If you can buy it on an exchange, it’s fine.” However, he warns, investing in cannabis-centric brands can be risky because the market is still volatile — partially because cannabis is still illegal at the federal level, due to its Schedule I ruling as a controlled substance with no medical value.
However, with the US Food and Drug Administration-approved study of cannabis and post-traumatic stress disorder now underway, this could be the biggest indicator yet that the federal legal status of cannabis might soon change.
“The pace of investing is going to accelerate, and there will be fewer opportunities for the little guy as big guys move into the sector and really start putting big bets down,” says John Downs, director of business development at cannabis investment company The Arcview Group. Downs explains that we’re “going to see a big run-up in the price of US-based cannabis companies” in the next year or two as we get closer to legalization.
“There’s a huge discount we see applied to a lot of companies because it’s federally illegal, so if we see legalization, there’s definitely an expectation we’re going to see an increase in valuations of stocks,” Downs says.
But When It Comes To Cannabis, Where Do You Invest And How Do You Invest Safely?
Both Downs and Spatafora advise that anyone who’s going to invest should do a lot of research beforehand, particularly on the companies they’re interested in. While it’s a gamble, it’s best to look at brands that don’t yet have a lot of hype around them. If someone is telling you that you have to buy a certain cannabis stock right away, then by that stage it’s probably already too late, as the product has been promoted and plugged, and as a consequence has likely already increased in price.
Also, always make sure any company you’re going to invest in is complying with state and local laws so there’s less risk involved, and make sure to only invest in public companies if they are reporting their finances.
“I would not buy any publicly traded company that does not report its financials. Period,” Downs says. “That’s a red line you shouldn’t cross.”
Buy The Rumor, Sell The News
In terms of making the smartest trades, Downs suggests buying stock when there’s a rumor that legislation is coming that might increase its value — like legalization, for example — and then sell it when the rumor comes true.
“There’s an old saying on Wall Street that you ‘buy the rumor and sell the news.’ You’re trying to beat other people to the punch and put yourself into a position to profit when the news actually hits,” Downs says. “You want to be invested when it becomes legal, not wait to be investing [after] it becomes legal.”
Essentially, you might be buying the rumor that cannabis is going to get legalized in the next couple years, then when it does come to fruition and you see a bubble forming, you’ve already bought into it. That’s why it’s savvy to invest in cannabis now, because it probably won’t be as profitable when big banks and larger investors are getting involved later.
It’s also important to know that you don’t have to buy a cannabis stock to benefit from legalization that is likely to come later. You can invest in ancillary brands, like construction companies and financial services, that support the industry without touching the plant. Really, any brand that serves the cannabis industry or is connected to it will benefit from legalization.
For his part, Spatafora recommends investing in packaging companies servicing businesses that provide bud or cannabis concentrates that are really starting to make bank. “These packaging companies are some of the ones that are making the best revenues,” Spatafora insists.
Downs says companies that deal with cannabis data, like BDS Analytics, as well as companies that serve the manufacturing side of cannabis, make for solid, dependable cannabis-related investments. Basically, any company serving cannabis infrastructure is a good bet.
While it’s financially speculative to invest in cannabis pre-legalization, it also brings a lot of potential rewards. If you wait until everyone is doing it, then you might not see much of a return on that investment. If, however, you invest now, you could see a huge payday in only a few short years. As with anything to do with playing the stock market, nothing is guaranteed, but it is certainly possible that people have been able to get into a brand-new industry like this one. With the Bitcoin explosion having died down somewhat, it could now finally be bud’s time to shine on the stock exchange.