Marijuana products can be categorised into two broad categories.
Medical marijuana: This product is only legal in the district of Columbia, 35 states of the US and approximately 30 countries. For getting access to medical marijuana, a prescription is required from authorised healthcare by the patient. Generally, medical marijuana is prescribed to adults who are suffering from stress, pain, depression or anxiety.
Recreational marijuana: D.C. and 15 states of the US have legalised the use of recreational marijuana for adults only. In Canada, recreational marijuana has been legal since 2018 October. In Uruguay, it is legal since 2014.Summary
When recreational and medical marijuana is compared, medical marijuana offers short term earnings potential, whereas recreational marijuana is attracting many investors after it is getting legal status in different states of the US.
The marijuana stocks can be categorised into four categories as per the facets of the industry:
Growers – It includes those companies which are involved in the cultivation of marijuana and own the marijuana farms.
Retailers – Retailers are the dispensaries where cannabis-related products and marijuana can be purchased as oils, edibles to name a few.
Manufacturers – The manufacturers of the marijuana industry provide ancillary support and are involved in product preparation, cannabis extraction, labelling and packaging.
Drug markers – The pharmaceutical companies which are involved in the manufacturing of drugs that include cannabis products as one of the ingredients.
Companies which are connected to the marijuana industry can make benefit due to the continuous growth of the industry.
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There are range of risks which should be considered before investing in the marijuana stocks.
Business risk: As the marijuana is still in the process of getting legalised in many places, it is a difficult task to open bank accounts of the marijuana companies. Majority of the marijuana manufacturers and producers rely on cash, and it adds risk from the accounting and liability perspective.
Legislative risk: The growth of the marijuana industry is dependent upon the legislation and legalisation, which extends considerable amount of risk. Presently, there is no taxation policy in the marijuana industry and people do not pay sales tax. In case the sales tax is introduced in the marijuana industry, then it might push away the consumers.
Valuation risk: Because of the growth potential of the marijuana industry, more suppliers are entering in the marijuana industry and it could outpace the growing demand of marijuana. With the spread in the legalisation, it is possible that the ultimate consumers might produce small batches for their personal consumption. This can happen in case the taxes are applied on the sales of the marijuana stocks.
Volatility risk: The prices of the marijuana stocks can show significant amount of the swing in short period of time. This factor is not of concern in case the investor is planning to invest in the marijuana stocks for more than 10 years. If the investment horizon is small, then it is recommended that volatility should be considered before making investment decisions.
Like an investment in the stock market, a broker is required for investing in marijuana stocks. Due diligence should be conducted before making the investment decisions, that is, each company should be analysed and strong knowledge about the changing regulations should be maintained.
Marijuana investments can be categorised into two types, marijuana ETFs and individual stocks. With investment in the ETFs, the investment can be spread across the marijuana industry. For making earnings in a short term, then the individual stocks should be preferred. Else, the ETFs should be considered as the investor is not required to analyse each company.
Marijuana ETFs: The investment result of a few ETFs corresponds to the index and few are actively managed. The expense ratio of index ETFs is lower than the actively managed funds. However, the actively managed funds respond in an active manner to the information made available in the market. Therefore, the ETFs are composed of both index options and actively managed funds.
Marijuana stock: The US marijuana companies are involved in illegal activities due to which there is limited marijuana stock which is listed on the exchanges. The Canadian cannabis companies have been able to gain a listing on major exchanges such as New York Stock Exchange and NASDAQ after they were legalised in 2018.
There is a difference between the US cannabis and the Canadian cannabis companies. The US companies are looking forward to raising companies and therefore forced to trade OTC and get listed on the secondary market. The OTC stocks do not have financial records and are exposed to price manipulation; therefore, they are dangerous.
The publicly listed marijuana companies are increasing. While evaluating the investment opportunities, it is recommended that investors should be made in the large market cap companies as it ensures long term financial stability.
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Only those investors should take a position in the marijuana stocks who have a high level of risk tolerance. Moreover, aggressive investors should not invest too much in the individual marijuana stocks or the ETFs as the marijuana stocks are highly volatile and risky.
The investor should begin with a small portion of the investment. Once the company or the industry grows and ensures an increase in revenue then more shares can be bought. In case, the company is not showing the expected growth, then the investment should be re-evaluated.
Lastly, the dynamics of the marijuana industry are changing very fast, therefore, the investor should not make an investment based on the long-term view. The criteria for making the buying decision can be different within few months.