Investors are eager to get into marijuana stocks investing after the projections of its incredible profit in the next five years. Ackrell Capital, an independent marijuana investment company, is expecting the combined sales of medical and recreational marijuana could hit 23 billion by 2020. With these numbers, there’s no doubt that many of us are eager to jump into marijuana investing. However, don’t get too ahead of yourselves yet. Before charging into the industry head-on, you will need to prepare yourself and do some thorough research.

When it comes to where to find marijuana stocks to invest in, most companies are too small to trade on federal exchanges like the New York Stock Exchange (NYSE). There are, however, several exceptions, like GW Pharmaceuticals which trades on the Nasdaq. They are not strictly a marijuana-specific company, but they do participate in pharmaceutical research on drugs that involve cannabis.

Keep in mind that while some cannabis companies are seeing success — for example, Dixie Elixirs — the majority of businesses in the cannabis industry are startups. As such, many of them have the passion and activism for the future of marijuana but this does not mean they have the business leadership or are able to take their businesses through the tough times of being a startup. One of the most troubling problems encountered by cannabis businesses is federal tax code.

Because marijuana is labeled as a Substance I drug, the plant is illegal at a federal level. Thus, businesses cannot receive write-offs for operating and marketing costs. This can be detrimental to revenue. If you wish to put your money into the industry, keep in mind of management, experience, and reputation of those working at the company, as well as the fact that often, you won’t see big returns despite expectations of a high profit (as mentioned above).

If, after all of this, you still wish to make some marijuana investments, consider over-the-counter (OTC) and/or penny stocks (pink sheets). These are ways to trade outside of federal exchanges, meaning regulation is not as tight. But this also means investors must be more diligent in choosing which marijuana stocks to invest in. You will need to really research each investment and company, and this can be extremely time-consuming.

Tips for Investing in Marijuana Stocks

To get a better idea of what you are getting into with marijuana investing, Evan Eneman, a partnering manager of Casa Verde Capital — a venture capital firm that invests in businesses within the cannabis industry — gives a few tips:

• Proceed each marijuana investment with the utmost caution and care. Be aware of potential scams, and have a healthy amount of skepticism when evaluating business models and managements.

 

• Consider companies that do business in other legal market areas — even if they are not related to cannabis, they can help with the industry. An example of this is Heliospectra, an agri-tech lighting company. Their stock is traded OTC in the U.S. but do more research. Are you investing in the parent company, or just a part of the operation? If you invest, how will this change your risk profile and outlook on total investments?

 

• Talk to brokerage experts, professionals, and even media sites such as Motley Fool. As you know, companies are not always upfront and honest, especially starting out. Be skeptical of anything you read in press releases or company-made content/marketing. Don’t believe everything the company tells you.

 

• Keep in mind, as you get more into marijuana investing, that not only is the industry in its very early days, it is also developing along with various regulations and changing legislature. Medical marijuana is more accepted legally in the United States than recreational, so expect a deviation in the market.

 

• Learn about the executive team. Where do they come from, and what are their credentials? Do they have a tendency to hide when things get bad, or can they weather stormy weather and the harsh environment of business? Are they flexible and adaptive enough to plan, implement, and execute business objectives in an ever-changing landscape of regulations, and legislations? Is the management being lead with strong governance and sturdy internal control?

With new technologies such as no-fee trading apps on smartphones (Robinhood is an example), opportunities to invest is more accessible than ever. But accessibility does not mean that we throw our money away at whatever stock seem the most promising. The best advice is still some of the oldest rules when it comes to investing: diversify your portfolio and hedge your bets whenever possible.

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