How to Invest in Cannabis Stocks – A Simple Guide for Beginners

Many investors are eager to get a piece of the action, given the amount of money involved. However, unlike the traditional stock market, investing in cannabis stocks is substantially more complicated due to the industry’s legal status.

Hardly a day goes by without headlines reporting record cannabis profits. According to a report by Grand View Research, the global legal marijuana market size was valued at $17.8 billion in 2021 and is expected to grow at a compound annual growth rate (CAGR) of 25.3% from 2022 to 2030. 

Below we provide a step-by-step guide to investing in cannabis stocks, including which ones to buy, what to look for, and what to avoid.

Learn the Basics of the Cannabis Industry

Before diving in, it is important to know the different types of businesses you can invest in. Here are the most common types if you want to get into the cannabis business:

• Cannabis growers and dispensaries: These companies cultivate and sell cannabis products. They can be categorized as either medical or recreational cannabis growers, or both.
• Cannabis biotech companies: These companies are involved in researching and developing cannabis-based drugs and treatments. They focus on developing new pharmaceuticals and medications using the compounds found in cannabis.
• Ancillary product and service providers: These companies provide products and services that support the cannabis industry but do not directly cultivate or sell cannabis products. Examples include lighting and irrigation equipment, packaging solutions, and security systems.

Understanding the different types of cannabis businesses can help you make informed investment decisions based on your interests and goals. 

Understanding the Risks of Buying Cannabis Stocks

As with any investment, this comes with risks. It’s essential to be aware of these risks so that you can make educated deals and minimize your losses. Here are some potential risks to consider:

• Business Risk: Cannabis companies are still relatively new; many are small and untested. There is a risk of failing to leave you with nothing.
• Legal Risk: The legality of cannabis at the federal level is still uncertain, which could lead to legal challenges that could impact the industry.
• Valuation Risk: Some top cannabis stocks may be overvalued, meaning they are trading at a higher price than what they are actually worth.
• Demand Risk: As more states legalize cannabis, the market may become oversaturated, leading to decreased demand and lower profits.
• Volatility Risk: The cannabis industry is subject to rapid changes, and the stock prices of cannabis companies can be highly volatile, leading to significant fluctuations in value.

While the profit potential is high, the risks can be substantial. Therefore, before you invest any money in any cannabis stock, you must understand these risks. 

How to Invest in Cannabis Stocks

Once you understand the basics of the cannabis industry and the risks involved in investing in it, it’s time to start investing. Here are the steps you need to follow to invest in it:

1. Choose a Broker: You’ll need a broker to buy and sell stocks. Look for one that offers low fees and easy-to-use trading platforms.
2. Decide Between Individual Stocks and ETFs: There are two types of marijuana stocks: individual stocks and marijuana ETFs. Individual stocks are shares of a single company, while marijuana ETFs are funds that invest in multiple companies.
3. Research and Choose Your Investments: Once you’ve chosen your broker and decided on individual stocks or ETFs, it’s time to research and select your investments for the best cannabis stocks for you. Look for companies with strong financials, experienced management teams, and solid growth potential.
4. Monitor Your Investments: Investing here is not a set-it-and-forget-it strategy. You’ll need to monitor your investments regularly and be prepared to make changes as required.
5. Diversify Your Portfolio: It’s always a good idea to diversify your portfolio to minimize risk. It means investing in multiple stocks or ETFs in different areas of the cannabis industry.

Top Cannabis Stocks to Watch in 2023

Investing in this industry can be risky, but if you do your research and choose wisely, it can also be rewarding. Here are three of the best ones to look out for in 2023:

• ETFMG Alternative Harvest ETF (MJ): The first marijuana ETF listed on the New York Stock Exchange. The fund holds a diverse mix of cannabis stocks, including growers, biotech firms, and companies that provide ancillary products and services to the industry. With a cannabis stock market cap of over $1 billion, MJ is one of the most popular cannabis ETFs on the market.

• Canopy Growth Corp. (CGC): Canopy Growth is one of the largest cannabis companies in the world, with operations in Canada, the United States, and Europe. The company produces and sells various cannabis products, including flowers, oils, and soft gel capsules. Despite some recent challenges, Canopy Growth remains a leader in the industry, and many analysts are bullish on its long-term prospects.
• Horizons Marijuana Index ETF (HMNUS.NE): This Canadian ETF provides exposure to a wide range of cannabis companies, including both growers and ancillary firms. HMNUS.NE has outperformed many other cannabis ETFs in recent years and is a solid choice for investors looking for broad exposure to the industry.

Final Thoughts

Investing in cannabis stocks can be a lucrative and exciting way to participate in the rapidly growing legal marijuana industry. However, it’s important to remember that the market is still young and volatile, and not all companies will be successful. Therefore, before investing in any cannabis stock, it’s essential to do your research and understand the potential risks involved.

At Safe Harbor Financial, we understand the unique challenges and opportunities presented by the legal cannabis industry. So, if you’re a cannabis entrepreneur looking for a partner you can trust, contact us today or call 501-476-6696 for a quicker response to learn more about how we can help you grow your business. And if you’re an investor looking to enter the exciting world of cannabis, we’re here to provide guidance and support every step of the way.