In what used to be a somewhat dirty word, the industry surrounding Marijuana is growing at an exponential pace. In fact, according to BDS Analytics and ArcView Market Research, global spending on marijuana-based products surpassed $9.5 billion in 2017, with the same study projecting that this figure will increase to $32 billion by 2022.
Grand View Research are even more optimistic, with the firm projecting 2025 levels to exceed $146 billion. Whilst at this point in time projections are merely speculation, what we do know is that where there is demand, there’s money to be made.
As such, there are now a plethora of publicly listed marijuana-based stocks that you can now invest in. Whilst these stocks won’t be for everyone, it is well worth spending the time to understand what kind of potential the industry might have in the medium-to-long term.
In our guide to marijuana stocks, we’ll start by explaining the legal uncertainties surrounding the phenomenon, including a mention on the notable jurisdictions currently dominating the space.
After that, we’ll then breakdown some of the different types of organizations that are involved in the marijuana industry, followed by an overview of how you can get started with an investment.
What is Legal Marijuana?
First and foremost, it is fundamental to understand the two different segments of legal statuses surrounding marijuana. Notably, this includes ‘Medical Marijuana’ and ‘Recreational Marijuana’.
In a nutshell, medical marijuana is exactly what it says on the tin. Marijuana is prescribed by an authorized healthcare practitioner with the view of using the substance to help with certain symptoms. Whilst symptoms can vary widely, in the vast majority of cases this will centre on pain, stress, depression or anxiety.
The product itself usually utilizes cannabidiol, or simply CBD. This can be consumed in a range of different forms, such as inhaling, creams, vaping and even via edible products.
On the other hand, and as the name suggests, recreational marijuana is primarily for recreational usage. In other words, recreational marijuana is not consumed for medical purposes, rather it is for personal usage.
Regardless of whether the underlying purpose is medical or recreational, by investing in marijuana-based stocks, you will be backing a segment of the industry that is fully licensed and thus, operates within a highly stringent regulatory framework.
However, to give you a brief overview of where legal marijuana is making a name for itself, medical marijuana is now broadly legal in 30 U.S. states. Within Europe, multiple nations allow medical marijuana usage with strict guidelines. This includes the likes of Germany, Denmark, Switzerland, Norway, the Netherlands, Greece, Italy and Malta, among many others.
The UK has taken a rather steady approach to legalization, although in November 2018, the government made its first steps by relaxing the rules in certain circumstances. This will be limited to specific patients such as those suffering with a rare form of epilepsy, and must be prescribed by specialized doctors.
In terms of the legal status surrounding recreational usage, this is still very much in its infancy. In late 2018, Canada became only the second jurisdiction to allows its citizens to legally purchase marijuana on a recreational basis, with Uruguay being the first. However, 9 U.S. based states also allow recreational usage.
Ultimately, the purpose of this section of our guide to Marijuana stocks was to illustrate the rapid growth of the space, at least in terms of the medical segment of the industry. However, if more first world nations join Canada in the legal recreational arena, growth levels are likely to follow suit.
So now that we’ve covered the legalities, in the next section we will break down the different types of marijuana stocks currently operating in the market.
What Types of Marijuana Stocks can you Invest in?
Before you invest in marijuana stocks, it is important that you first understand the different types of organizations that you can invest in. Remember, you are investing in the growth of the specific organization themselves, rather than the underlying product. However, there is obviously a correlation between increased legalization and consumer demand, and that of the growth of companies operating in the industry.
In other words, as more and more nations legalize marijuana (especially in the form of recreational usage), although this cannot be said with any certainty, the medium-to-long term prospect of your marijuana-based investment should be more bullish than bearish.
Nevertheless, marijuana stocks can generally be broken down into three main segments, which we have listed below.
The vast bulk of marijuana-based investment stocks are centred on the actual growers. These are highly regulated organizations that cultivate the marijuana, harvest the crops and then distribute them to third party sellers.
To illustrate the size of this particular segment, Canopy Growth Corp, a Canadian based grower of marijuana, are listed on the New York Stock Exchange (NYSE) with a recent market capitalization of $21 billion. Not far behind is that of Canadian counterpart Tilray, who at the time of writing have a market capitalization on NASDAQ of just over $7 billion.
Outside of the growing space, an alternative investment-based marijuana stock that you might consider further is that of the biopharmaceutical space. These companies are responsible for developing cannabis-based drugs, with the view of obtaining the required regulatory status for mass supply.
One such example of this is UK based GW Pharmaceuticals. Traded on the NASDAQ exchange, GW Pharmaceuticals are well known for producing cannabis-based drugs that aim to treat multiple sclerosis.
Ancillary Products and Services
The third key player in the marijuana stocks investment space is dominated by companies that provide marijuana-based ancillary products and services. These organizations provide the framework for growers and biotech firms, by supplying products such as lighting, packaging, management, distribution and hydroponic products.
An example of an organization that falls within this particular segment is Scott Miracle-Gro, who are listed on the NYSE.
What are the Risks of Investing in Marijuana Stocks?
As noted earlier, the potentialities of a marijuana-based investment will have a direct relationship with the legal status surrounding its usage. In effect, this will be on a jurisdiction-by-jurisdiction basis, and thus, regime changes can have a highly detrimental effect on the industry’s growth.
Moreover, just because the industry is growing, this doesn’t mean that the company you back will follow suit. As such, you need to ensure that you take some time to research the performance and financial health of the organization themselves, as opposed to focusing purely on the marijuana industry in its entirety.
How to Invest in Marijuana Stocks
As with any financial product or service, you first need to ensure that you have performed sufficient independent research on the organization that you are backing. This not only includes the company themselves, but the wider regulatory status of the markets they operate in.
For example, if an organization sells the vast majority of their product to a singular nation, but the domestic legal status of marijuana remains uncertain, then you need to ensure that you are kept abreast of any developments.
If you find a company that you want to invest in, your next step will be to locate a broker that can facilitate the deal. Remember, the organization needs to be publically listed on a major stock exchange for you to make an investment. Alternatively, whilst OTC (Over-the-Counter) stocks in the marijuana space do exist, these are potentially suited for more experienced and high-level investors.
Once you find a suitable broker, and you understand how their fee structure works, you can then proceed to purchase the required stocks. Some brokers will have a minimum investment amount, so do bare this in mind too.
If you are a firm believer that the growth of the legalized marijuana industry is set to continue long-term, but you can’t decide on a specific company to invest in, then you might want to instead consider an ETF.
An ETF, or Exchange Traded Fund, is a financial mechanism that allows you to speculate on the growth of a particular commodity, without actually needing to hold or store the commodity itself. Other examples of ETFs include Gold, Silver, Oil and Wheat.
At the time of writing, the largest marijuana ETF currently in operation is the Horizons Marijuana Life Sciences ETF. This particular ETF tracks its prices based on the performance of companies that generate their revenue from medical marijuana.
This index utilizes the value of organizations based in Canada (74%), with the remainder distributed between the U.S. and the UK.
The great thing about ETFs is that you are technically speculating on the industry itself, meaning that as long as the wider space is performing well, the ETF should follow suit. Moreover, ETFs also allow you to ‘Go Short’. This means that if you think the overall value of the marijuana industry is set to decline, an ETF can facilitate this.
In summary, if more and more jurisdictions continue to relax their laws on marijuana usage, especially in the case of the recreational space, then the future for marijuana-based investments could be bright. However, regulatory uncertainties will always remain in place, and thus, there is no guarantee that the industry is here to stay in the long-term. Ultimately, make sure that you perform your own research, both prior and during your investment journey.