What’s the Current Status of Weed Stocks?

The legal cannabis industry is attracting more and more investors that wish to diversify their portfolios. Global spending on cannabis reaching more than $9 billion in 2017, and is expected to grow to more than $32 billion by 2022, according to ArcView Market Research and BDS Analytics.

Canada became the first developed country in North America to allow the recreational use of marijuana for adults on mid-October 2018, and there are 33 legal medical marijuana states (and DC) and 10 legal recreational marijuana states (and DC) in the USA this year, according to ProCon.org.

Investors hope that other countries around the world will follow suit and legalize the use of recreational marijuana, pushing global production capacity and consumption higher, supporting weed stock prices.

Weed Stocks – Should investors be prepared for a bubble ready to burst?

Ahead of this historical event in Canada, weed stocks were flying high, similar to a ‘gold-rush’ on the hope that this legalization will inspire other countries around the world to follow suit, and in turn, support global weed production and consumption in the upcoming years, as well as encourage more investment in the industry. Many companies in unrelated sectors are suddenly seeing this new expanding market as a way to diversify their offering and be part of what many consider to be the “next big thing”.

For instance, this year the company Constellation Brands, which owns Corona and Modelo Beers, heavily invested in Canopy Growth Corp, one of the largest publicly traded pot stocks, which is up more than 43% year-to-date. When the alcoholic beverage giant bought 104.5 million shares worth $4 billion in Canopy Growth Corp., it settled the biggest deal in the marijuana industry so far, solidifying its presence in this booming industry. While Constellation Brands is currently dealing with dragging revenues, the company hopes to offset them with new products such as cannabis-infused drinks.

The buzz around weed stocks and future legalization has been supporting prices for the last couple of years, but some investors fear that this buzz is leading to a stock price bubble that will soon burst, due to the speculative nature of the industry. Weed stocks are not for conservative investors – they are a new kind of investment, with a unique set of risks, and can be atypically volatile for a range of different reasons.

First, let’s not forget that most stocks are only available through OTC (Over-The-Counter) markets rather than through largely regulated stock exchanges, which means that investors must face trading risks associated with OTC products: counterparty risk, market risk, liquidity risk, etc.

Secondly, the dynamics of this industry are fast-changing, similarly to crypto coins as it was last year with Bitcoin, Ethereum, Ripple and other coins – many investors do not fully understand the challenges that these companies have to face in the future, nor what to look for it, or expect from, related weed-businesses. The uncertain legal status of marijuana is another variable – there’s no way of knowing when (or even whether) more countries will follow Canada’s example. In addition, the issue of legality within the USA is still far from settled, with a significant number of Republicans (such as the recently departed Attorney General Jeff Sessions) still against legalization, despite a majority of voters in favor across both parties.

Finally, many investors are jumping into this market due to unreliable psychological biases, such as the well-known FOMO (Fear Of Missing Out), and not because they know what to look for in marijuana companies (growth strategy, solid financial situation, profitability, etc.)

How Can You Earn From Weed Stocks?

If weed stocks fit your trading profile, then you need to pay attention to a couple of things before investing in this industry.

First, you need to understand that there are different types of cannabis products within two main categories: 1) medical marijuana, and 2) recreational marijuana. There are also 2 main chemical components, CBD and THC, each with different properties.

Medical marijuana requires a prescription from a professional and authorized healthcare provider and has a high concentration of Cannabidiol (or CBD), which is the chemical that does not produce any psychoactive effects. Recreational marijuana does not need any medical justification and contains more Tetrahydrocannabinol, or THC, which is the chemical that produces the “high”.

As you have different types of marijuana, you also have different types of weed companies in the industry: the pure-players (growers and producers) and non-pure players (bio-techs, supply providers, packaging makers) that focus on different parts of this business.

You also need to understand the risks involved with marijuana companies. Naturally, there is the ever-present legal and political risk, as buying and selling marijuana remains illegal in many countries. In the U.S.A., selling marijuana is illegal at the federal level, and dealing with marijuana-related businesses can be very risky for banks and other kinds of financial institutions, as the financial sector has very strict restrictions. Raising money and gaining access to checking accounts can be difficult for companies that want to be part of this industry.

Finally, there is a certain complexity in the dynamics in this industry that might make it difficult to assess the current value of a company and its prospects for the future. To get around this, you should try to learn about the management team, the company’s current products/services, its strategy to expand its activities or gain more market share, the competitive advantage of the company, its profitability, and financial health, its current and future investments, etc.

Bottom-Line

Week stocks have a wide array of trading opportunities, but you need to be ready for a bumpy road – the marijuana marketplace has a long way to go before it stabilizes, with significant legal and political hurdles to overcome – although of course, the volatility of this market is where all the opportunity lies!

To be better prepared for this kind of risky investment, always use a regulated and reliable broker, like ICMarkets, as it will ensure that you’re trading in a secure environment with the best trading conditions. You will also benefit from a robust trading platform with various money management tools to help you better control and mitigate your risk.