In the majority of the U.S., marijuana has been at least partially legalized. Although it's more common for states to allow limited cannabis use for medicinal reasons, a number of states have expanded legalization to include its use for recreational purposes as well.
As the marijuana market grows with states relaxing their laws, many people want to learn how to invest money in different aspects of the industry, including buying shares of growers and retailers. Fortunately, there are an increasing number of options to invest in cannabis companies — including some exchange-traded funds that make figuring out how to invest in marijuana really simple.
But before you invest in marijuana, there are some important aspects of the industry to understand. This article will explain the basics, and also share some of the easier ways to get started investing in marijuana and other cannabis businesses.
Understanding the marijuana industry
Although there is potential for growth within the nascent cannabis industry, there's always a risk of loss with any investment. That's why it's important to make sure you understand any investments you're making before you buy into the marijuana business.
First, you'll have to decide which market you want to invest in — the one for medical cannabis, the one for recreational marijuana, or both. There is also the cannabidiol (CBD) industry to consider. You'll also need to determine what type of companies you feel have the best potential to help you make a profitable investment.
Let’s take a closer look at the primary distinctions when it comes to cannabis businesses — including the two primary markets and the three branches of the industry.
Medical vs. recreational marijuana
Both medical and recreational pot stocks are well-poised for growth, but you may feel that one market has better potential than the other.
If you want to invest in companies that research the health benefits of marijuana and that develop cannabis products aimed at treating specific medical conditions such as cancer or epilepsy, you'll want to concentrate on investing in medical marijuana. In 2019, the medical marijuana market accounted for around 71% of the revenue within the legal marijuana market, according to a report from Grandview Research, Inc.
If you'd rather invest in cannabis products developed and sold to customers who want to consume them for use outside the scope of a medical prescription, you'll likely prefer to buy stock in companies in the recreational marijuana industry instead.
Because states have been slower to legalize marijuana for non-medical use, recreational marijuana accounts for a much smaller share of total revenue within the marijuana industry, but there's tremendous growth potential in the right legal environment.
Three branches of the marijuana industry
Once you’ve decided on medical versus recreational marijuana as your investment choice, you still have further decisions to consider. You may wish to focus your investing within a particular aspect of the marijuana industry.
The three branches of the marijuana industry are:
- Cannabis growers and retailers: Marijuana growers and retailers do exactly what it sounds like — they grow marijuana products and sell them to consumers. This includes those who cultivate cannabis plants and sell them wholesale to retailers and dispensaries, and others who get the product into the hands of consumers. Depending on which state you’re in, the relationship between growers and retailers may be regulated differently.
- Cannabis-focused biotech companies: These are companies focused on researching and developing new drugs and therapeutic treatments. They could be studying and/or manufacturing cannabinoids.
- Providers of ancillary products and services: Ancillary products are those on the outskirts of the marijuana market but related to it. Investing in them means buying shares of companies who provide services such as hydroponic technologies to facilitate farming or companies that package cannabis products. Many of these companies are less impacted by the complicated legal rules that can make other aspects of the industry high risk.
Popular marijuana stocks and ETFs
No matter which cannabis market you're interested in or which aspect of the marijuana industry you want to invest in, you have many options for cannabis stocks to buy. There are pot stocks available on the New York Stock Exchange, NASDAQ, and over the counter.
You can also buy exchange traded funds, which hold a variety of assets, such as stocks in multiple different marijuana companies. ETFs make it easy to hold a more diversified portfolio within the cannabis industry and typically require less attention from the individual investor as well.
Here are some of the most popular investments available:
|Company name||Company type|
|Canopy Growth Corporation||Cannabis growers and retailers|
|Cronos Group||Cannabis growers and retailers|
|Green Thumb Industries||Cannabis growers and retailers|
|Aurora Cannabis||Cannabis growers and retailers|
|Aphria, Inc.||Cannabis growers and retailers|
|Tilray||Cannabis growers and retailers|
|Cresco Labs||Cannabis growers and retailers|
|Charlotte's Web||Cannabis growers and retailers|
|HEXO Corp.||Cannabis growers and retailers|
|OrganiGram Holdings||Cannabis growers and retailers|
|GW Pharmaceuticals||Cannabis-focused biotechnology company|
|Cara Therapeutics||Cannabis-focused biotechnology company|
|Corbus Pharmaceuticals||Cannabis-focused biotechnology company|
|The Valens Co.||Ancillary Provider|
|ETFMG Alternative Harvest ETF||ETF|
|Horizons Marijuana Life Sciences ETF||ETF|
How to invest in marijuana
If you want to invest in marijuana, you have a few primary options. The first is to research stocks and ETFs on your own and buy shares of the companies or funds you're interested in. Sometimes this is easy because the stock or ETF trades on the NYSE, which is the world's largest marketplace for buying equities and is accessible to you from any discount online broker.
But some marijuana stocks are instead sold on the Canadian stock exchange, and others are penny stocks that trade over the counter. When penny stocks trade over the counter, that means they aren't listed on a formal exchange; instead you have to buy them directly from a broker-dealer network. Figuring out how to buy these types of stocks can be more complicated and there's more risk involved. If it's important to you to be able to buy penny stocks or Canadian stocks, you'll need to take that into account when determining how to choose a brokerage to work with.
If you've already invested in other stocks, you hopefully know how to do research into the fundamentals of a company before you buy shares. But if you're just getting started in the stock market you need to know what steps to take to research individual marijuana companies.
Here are a few key things to consider before you invest in a marijuana company:
- The stability of the company and industry: How likely is it the company and industry will be around in a year, five years, or 10 years?
- Trends in the company's earnings: Has it earned more over time?
- The company's position within its industry: Does the company have a reasonable share of the market and/or a strong competitive advantage?
- The company's leadership team: Are you confident in the people at the helm? Do you know who is behind the company?
- The company's price-to-earnings ratio: How does the price of a stock share compare to the company’s earnings? A higher P/E means there's more potential for future growth.
- How much debt the company has: If the company has substantial liabilities relative to its equity, it's a riskier bet.
You'll always want to do your due diligence to reduce the risk of picking a company that performs poorly and causes your investment to lose money. That said, investing will always have a level of risk involved and here’s no guarantee you’ll see a return on your money.
An easier way to start investing in weed
If you aren't experienced in picking stocks or ETFs, doing the smart research can be complicated. This is true with any stock, but it is especially the case with marijuana because so many of the stocks aren't sold on the NYSE. Cannabis companies can be harder to investigate and more difficult to buy into.
If you'd prefer to take a simpler approach, you can use an investing app like Stash to buy fractional shares of ETFs like Corporate Cannabis. With fractional shares, you specify how much money you want to invest, rather than how many shares you want to buy, so you can get started with as little as $1. In addition, investing in a marijuana ETF allows you to own a small piece of many different marijuana businesses and gives you a more diversified portfolio.
The risks of investing in weed
Although Wall Street analysts expect the marijuana industry to grow as much as 853% by 2024, there are still risks associated with investing in cannabis. One of the biggest is that law enforcement could potentially change on the federal level. Despite the legalization movement on the state level, if the federal government begins cracking down on the cannabis market, it could become more difficult for companies to operate and turn a profit.
There is also additional risk if you're opting to invest in penny stocks. These stocks aren't subject to as much regulation as stocks listed on a stock exchange and they don't have to provide the type of detailed financial disclosures that publicly traded companies on the NYSE do. Unfortunately, that means there's a higher likelihood of losing most or all of your investment if a company doesn't perform.
Although investing in marijuana has its own market-specific risks, you can mitigate some of these risks by researching investments carefully or opting to use a service such as Stash to buy ETFs that diversify your marijuana investments. By diversifying, you gain exposure to different companies within the cannabis industry and therefore also spread your risk across a variety of businesses.
With many people expecting to see the marijuana industry experience rapid growth, investing in legal cannabis may be an attractive proposition to you. Just be sure to take the time to figure out which type of marijuana investments are right for you and your personal finance goals so you can maximize your chances of earning gains as marijuana use grows nationwide.