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By Anna-Louise Jackson
June 23, 2021
A person is diving into a marijuana shape swimming pool.
Kiersten Essenpreis for Money

In the past decade, investing in marijuana companies has become mainstream as more and more American enjoy above-board access to the drug. Recreational and medical marijuana use now is legal in more than 30 states, and that’s led to more money flowing into stocks in this industry.

The U.S. cannabis industry, as it is known on Wall Street, could balloon to $100 billion in revenue by 2030, a 64% increase from 2020, according to projections by analysts at Cowen. While there are more options for investing in this burgeoning industry, most of the companies aren’t based in the U.S. and the companies have a relatively small market capitalization (or market cap, or a measure of its total value). Generally speaking, companies with a small market cap can offer higher risks, along with higher potential rewards. Here’s what you need to know before buying marijuana stocks.

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Overview of the marijuana industry

Even though the cannabis industry is growing, there are only a few dozen publicly-traded players. And because Canada legalized recreational marijuana in 2017, many pot stocks are headquartered there. In general, cannabis companies are broken down into the following categories:

Growers: These are the companies that grow and sell the plant, and are most directly linked to products ultimately sold at dispensaries. Examples of such products include: medical marijuana, recreational marijuana, and items that include CBD (cannabidiol).

Industry players: These companies are directly linked to growers, offering critical products or services that might include pharmaceutical drugs, packaging or real estate investments.

Ancillary companies: Companies in this space operate in other industries but have invested a financial stake in some of the cannabis growers.

Generally speaking, the closer a company is to the plant itself (and those products sold at dispensaries), the riskier it is as an investment. And shares of some of the biggest players — including Canopy Growth, Curaleaf Holdings, and Tilray — are twice as volatile as the S&P 500. As a result, investors must be comfortable with enduring some wild swings in stock prices.

There are a variety of reasons that explain why investing in marijuana stocks is risky. Publicly traded cannabis companies are still young and small, making for a more speculative investment opportunity. The Securities and Exchange Commission (SEC) has warned investors about potential fraud. Finally, even though marijuana is legal in a majority of U.S. states, it’s not yet legal at a federal level — and many banks won’t handle money for these companies, while some financial advisors are prohibited from offering investment advice about these stocks.

Ways to invest in marijuana stocks

There are two primary ways to invest: Buy shares of a cannabis-related company or invest in a fund that tracks this industry.

Individual stocks

As with any other investment, you will need to research the dynamics in the broader industry. In addition, it’s important to familiarize yourself with a company’s business (by analyzing its financials in quarterly earnings reports) and how its stock is valued (by tracking key metrics like its price-to-earnings ratio). Even if the long-term prospects for the industry are positive, that won’t make every company a winner.

To reduce risk, you may want to invest in multiple companies in the border marijuana space — from growers to ancillary companies. Here are 15 of the largest cannabis-related companies, based on market cap:

  • Tilray (TLRY)
  • Curaleaf Holdings (CURLF)
  • Canopy Growth (CGC)
  • Green Thumb Industries (GTBIF)
  • GW Pharmaceuticals (GWPRF)
  • Aphria (APHA)
  • Cronos Group (CRON)
  • Scotts Miracle-Gro (SMG)
  • Trulieve (TCNNF)
  • Cresco Labs (CRLBF)
  • Sundial Growers (SNDL)
  • Aurora Cannabis (ACB)
  • Hydrofarm Holdings Group (HYFM)
  • Cresco Labs (CRLBF)
  • GrowGeneration (GRWG)
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Marijuana ETFs

Because of the inherent risks related to investing in individual stocks, some investors may prefer to invest in exchange-traded funds (ETFs). There are nine ETFs that invest across those three aforementioned categories of companies and are traded on the U.S. stock market:

  • ETFMG Alternative Harvest ETF (MJ)
  • AdvisorShares Pure U.S. Cannabis ETF (MSOS)
  • AdvisorShares Pure Cannabis ETF (YOLO)
  • Global X Cannabis ETF (POTX)
  • The Cannabis ETF (THCX)
  • Amplify Seymour Cannabis ETF (CNBS)
  • MicroSectors Cannabis Index (MJJ)
  • Cambria Cannabis ETF (TOKE)
  • MicroSectors Cannabis 2x Leveraged ETN (MJO)

Marijuana mutual funds

Finally, there are fewer yet mutual funds that invest heavily in marijuana-related companies:

  • American Growth Cannabis Fund (AMREX)
  • Cannabis Growth Fund (CANNX and CANIX)

How marijuana stocks fit in your portfolio

You may already be investing in marijuana stocks without realizing it, particularly if your portfolio includes any index funds that track small-cap stocks. For example, Scotts Miracle-Gro is included in more than 150 ETFs, while Tilray is a member of nearly 20, according to ETF.com.

If you don’t want to do the necessary research to invest in individual stocks, an ETF or mutual fund may be a better option. This way, you can diversify your portfolio and potentially avoid the volatility associated with any single company, while gaining exposure to the broader industry.

Unlike bigger and more established industries, the cannabis industry still presents more risks to would-be investors. Many of these companies are small, foreign and aren’t traded on exchanges (rather, they’re traded via dealer networks, or what’s known as over-the-counter). As a result, these companies may not be subject to sharing the same financial requirements as companies in the S&P 500, for example.

Finally, the cannabis industry is evolving, so you must be comfortable with volatile price action in stocks and the possibility of companies going out of business. Some companies in this industry have drawn the interest of day traders on sites like Reddit, which has caused even more volatility. And the SEC warns investors about potential fraud related to microcap stocks more generally, and cannabis stocks specifically.

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How to buy marijuana stocks

If you are comfortable with the associated risks, it’s relatively easy to invest in this slice of the stock market. You must first open an online brokerage account, then find the specific pot stocks (or funds) that you’re interested in buying. You will want to consider how these investments fit into a well-diversified portfolio.

Because marijuana stocks (and funds) tend to be more volatile than the overall market, you should be mindful of the impact on your overall portfolio. And if you’re new to investing, first start by buying index funds that track broad market benchmarks and build a diversified portfolio that includes a mix of stocks, bonds, mutual funds, ETFs, and alternative assets. Experts recommend that you invest no more than 5% of your total portfolio to volatile assets, like marijuana stocks.

Before investing, you can research information about the companies, the stocks, the funds, and analyst commentary about the industry more broadly. And there may be an option within your brokerage account to do what’s known as paper (or virtual) trading, which lets you simulate the investment experience — without actually putting money on the line.

Finally, it’s important to have a long-term mindset. While all of the buzz around marijuana makes these stocks attractive, hurdles remain in the absence of federal legalization. And these stocks might experience some short-lived surges or slumps if investors bet on legalization efforts that don’t come to fruition, as has happened previously. As a result, it’s important to only invest with money that you are comfortable potentially losing and brace for potential volatility.

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