13 Mar How to Invest in the Cannabis Industry
The legal cannabis industry has been growing at an exponential rate in recent years as more states legalize both medical and recreational marijuana. This emerging market presents potentially lucrative investment opportunities for those looking to get in early before cannabis becomes fully mainstream.
However, research and due diligence are critical – the cannabis industry also carries substantial risk. Here’s a detailed guide on how to strategically invest in the cannabis industry.
Disclaimer: This article is intended to be informational only and does not constitute professional investment advice. Investing in any securities involves substantial risk and volatility, especially in emerging markets like cannabis. We strongly recommend consulting a certified financial advisor, accountant, and/or attorney before making any investment decisions related to the topics discussed here. While care has been taken to provide accurate information, there are no guarantees of future performance or returns from any investment. Invest at your own discretion and risk.
Conduct Extensive Research on the Market
Before investing any money, learn as much as you can about the cannabis industry by thoroughly researching the market size, growth projections, regulatory environment, leading companies and potential risks.
Dig into the specifics of which states have legalized cannabis and their particular regulations, restrictions and licensing processes. Understand the differences between medical and recreational cannabis markets, as well as how local markets vary across different states and regions.
Closely follow cannabis news headlines, political developments and regulatory changes that could significantly impact the industry either positively or negatively. Having a deep understanding of market dynamics will help you identify the best investment opportunities and avoid costly mistakes.
Evaluate Investing in Public Cannabis Company Stocks
One of the most direct ways to invest in the cannabis industry is to purchase stock shares of publicly traded cannabis companies. Here are some of the major publicly traded stocks to consider:
- Large multinational cannabis cultivators like Canopy Growth, Tilray and Aurora Cannabis that produce and distribute cannabis products across Canada and international markets.
- U.S. multi-state operators (MSOs) like Curaleaf, Cresco Labs and Trulieve that operate cannabis facilities in multiple states with legalized cannabis. MSOs stand to benefit greatly as more states legalize cannabis.
- Ancillary companies that provide products and services to the cannabis industry like Scotts Miracle-Gro (hydroponics) and Innovative Industrial Properties (cannabis real estate).
Conduct thorough due diligence on each company’s financials, operations, management team qualifications, growth strategies and market outlook before deciding which stocks to invest in. Spreading your investments across multiple companies in different sectors can help mitigate your risk.
Consider Investing in Cannabis Focused ETFs
Exchange-traded funds (ETFs) containing a basket of cannabis stocks are another option that provide instant diversification and easier access to the market. Here are some of the most popular cannabis ETFs to consider:
- ETFMG Alternative Harvest ETF (MJ): The first U.S. listed cannabis ETF with over $1 billion in assets. Holds stocks of cannabis producers and distributors.
- AdvisorShares Pure Cannabis ETF (YOLO): Focuses solely on plant-touching cannabis companies. More targeted cannabis exposure.
- Cambria Cannabis ETF (TOKE): Holds stocks of cannabis producers and CBD companies. Lower expense ratio than MJ.
Compare each ETF’s specific stock holdings, fees, liquidity, assets under management and historical performance track record. Investing in multiple cannabis focused ETFs can provide broader exposure to the industry.
Research Cannabis Focused SPACs
Special purpose acquisition companies (SPACs) have emerged as a popular vehicle for private cannabis companies looking to go public and access capital from public markets. SPACs provide opportunities for early investment in these private companies before they are formally public.
However, investing in SPACs carries substantially higher risk compared to established public companies. Conduct extensive due diligence on the management team, deal terms, company financials and long term business prospects before investing in any cannabis focused SPAC.
Consider Investing in Private Cannabis Companies
In addition to public stocks and funds, many investors are also allocating portions of their cannabis portfolio to high-risk, high-reward private investment deals. While private cannabis companies are difficult to access and research, they provide opportunities for larger returns compared to stocks.
Many new and early-stage cannabis businesses operating in limited license states are still private companies. While investing in private companies is riskier and less liquid, it can potentially provide much higher returns compared to public stocks if the company executes well and succeeds.
You’ll need to meet accredited investor requirements with minimum income, net worth and experience thresholds to access most private company cannabis deals. Investment minimums are also usually higher in the tens or hundreds of thousands. Use private market platforms or your personal network to find private cannabis investment opportunities in your specific state or region.
Though high risk, investing in successful private cannabis companies early can result in exponential returns over time.
Explore Cannabis Focused REITs
Real estate investment trusts (REITs) that own and operate cannabis cultivation facilities, processing sites and retail dispensaries are another option for investing in the cannabis industry. Major cannabis REITs to research include:
- Innovative Industrial Properties (IIPR): Focuses on regulated cannabis cultivation and processing facilities across the U.S.
- NewLake Capital Partners (NLCP): Owns dozens of cannabis retail properties across key limited license states.
These provide relatively stable real estate exposure to the fast growing cannabis industry. When analyzing potential cannabis REIT investments, look closely at their underlying property portfolios, tenant base, lease terms, dividend payout ratio, debt levels and management team experience.
Consider Investing Locally in Your State
Research the cannabis companies specifically operating in your state, especially if it only recently legalized medical or recreational cannabis. Local companies with good leadership could see tremendous hypergrowth but lack the exposure and funding of multi-state operators.
Attending state cannabis industry conferences and exhibitions organized by companies like XpoCanna can help you network with other local investors and entrepreneurs in your state’s cannabis industry. These events can identify promising early-stage cannabis investment opportunities in your area that are still under the radar.
Understand the Substantial Risks
While the long-term outlook and growth projections for the legal cannabis industry remain highly positive overall due to the tremendous market size, investors need to be aware of the still present risks.
Cannabis remains illegal at the federal level in the U.S., leading to significant regulatory uncertainty and restrictions that do not apply to other industries. Compliance costs and risks are substantial. Cannabis stock volatility also tends to be dramatically higher compared to other sectors.
Conduct extensive due diligence on any cannabis investment you are considering. Seek advice from financial advisors familiar with the unique nature of the cannabis industry. Only invest money you are comfortable losing entirely. The cannabis industry certainly holds great potential but also still carries substantial risk.
Start Building Your Cannabis Investment Portfolio
This guide only scratches the surface of investing in the rapidly evolving cannabis industry. Always thoroughly research any investment opportunity and consult investment professionals when needed.
The time to start strategically investing is now – while cannabis is still early in the process of becoming fully mainstream. Attend in-person cannabis expos, conferences and networking events to connect with companies and entrepreneurs in the space.
With proper due diligence and risk management, cannabis investments could yield strong returns over the long-term as the industry continues to expand and legalization advances. Consider taking a small position early if you believe in the long-term potential.
Frequently Asked Questions
Is it legal to invest in cannabis companies and stocks?
Yes, it is legal for all investors to purchase shares of publicly traded cannabis companies and ETFs in the United States. While cannabis remains federally illegal, major cannabis companies trade on major U.S. exchanges like the NYSE and NASDAQ and are subject to securities regulations. However, some risks from federal prohibition remain.
How much money do I need to get started investing in cannabis stocks?
You can invest any amount you choose to buy publicly traded cannabis stocks, ETFs or REITs. Some brokerages have minimum requirements to open a trading account, but those are typically under $500. Invest an amount you’re fully comfortable with and be prepared for potentially significant volatility and losses.
What are the best resources for finding private cannabis investments?
Check online private securities deal platforms and cannabis investment networks and message boards. Attend in-person cannabis industry conferences, conventions and networking meetups in your state and region. Getting to know local cannabis entrepreneurs and investors is key to finding promising private investment opportunities early.
Are cannabis stocks higher risk investments than other sectors?
Yes, cannabis stocks tend to see substantially higher volatility and risk compared to more established and diversified sectors like technology and healthcare. Extensive due diligence on companies is required. Diversify across multiple stocks, ETFs and asset classes. Be prepared to hold long-term and only invest money you can afford to lose entirely.
What should I research when evaluating specific cannabis companies?
Carefully examine the company’s financial statements, products and services, management team’s qualifications, operations, growth strategies, competitive environment and risks. Make sure you have a solid understanding of their business model, financial health and outlook. Review analysis reports and stock forums to see what experts are saying. Thorough research is critical before investing.
