We've come a long way from the simplicity of Ronald Regan's, "Just Say No." Marijuana legalization seemed impossible less than a decade ago, but now legal cannabis is quickly gaining momentum in states all across the U.S. This phenomenon leads many to wonder if cannabis stocks are a promising investment.
Read on to learn more about how marijuana legalization can impact the economy, and what that might mean for your wallet.
Are cannabis stocks a good investment?
February 2021 saw a major spike in cannabis stocks after a couple of slow years, as it seemed like federal legalization was on the horizon. Last month, Senate Majority Leader Chuck Schumer and Senators Ron Wyden and Cory Booker released a statement conveying that decriminalization of marijuana is a priority for the Senate.
Cannabis stocks have always been seen as unpredictable, but experts have stated they expect to see major growth in the upcoming months of 2021 and early 2022. As more states legalize recreational marijuana, bordering states begin to feel pressure to do the same. Also, recreational marijuana can provide major tax benefits that local government does not want to miss. These different factors may be a potential catalyst for the overall cannabis industry.
What to Look for in Cannabis Stock
Several cannabis stocks have emerged in recent years, and it can be difficult to decide which stocks might pay off in the long run. Nobody can know for sure what the future holds in the stock market, but there are a few factors you should consider when choosing a cannabis stock.
Take a look at who is running the show at companies you are considering investing in. Does this person, or do these people, have a track record of building businesses that see steady growth? Is there evidence that the management team is knowledgeable about the industry?
Spend some time investigating the company's financials too, especially its financial trends over time. Any company can experience spikes in growth, but the best investments are in companies that consistently show advancement over months and years instead of days or weeks.
Finally, learn more about a company's competitive position, and its growth strategy, before you invest. Are they forming key partnerships to expand their brand? Will they use new technology to increase their profits?
These are just a few questions you should ask before investing your money in a cannabis stock.
American vs. Canadian Cannabis Stocks
Both American and Canadian cannabis stocks have experienced growth in recent months, though Canadian stocks ultimately outperformed American ones. American and Canadian cannabis stocks differ widely in a few key ways.
Because marijuana is legal in Canada, and some companies do business in America, these companies can sit on U.S. stock exchanges. On the other hand, U.S.-based cannabis companies sell their stocks through over-the-counter markets in Canada instead of on an official exchange. Check out CNBC's piece on this topic, and speak with an expert to learn more about how these structures could affect you if you were to invest.
Risks of Investing in Cannabis
Like anything in life, investing in cannabis comes with some risks and drawbacks, including the following:
Federal Law in the U.S.
Cannabis is currently legal in 35 states for medical purposes and 14 states for recreational purposes. However, it is not yet legal on the federal level, so the possibility exists the federal government could impose federal law at the state level. This is not expected to happen; however, it's always important to be aware of all risks when investing.
Over the Counter Stocks
When U.S. companies participate in stock exchanges like the New York Stock Exchange or NASDAQ, they have plenty of regulations and requirements they must follow to maintain their membership. Some of these requirements include regular financial filing and minimum shareholder size.
Companies offering over-the-counter marijuana stocks do not have to meet these requirements, which can put you, and your finances, at risk.
Fraud and Scams
When investing in anything, avoiding fraud and scams must take priority. Many sketchy schemes exist in the world of stocks, and cannabis remains no exception. Purchasing stocks with a trusted investor can help you avoid fraud that can end up costing you thousands of dollars.
How to invest in cannabis stocks
If you're interested in investing in the cannabis industry, ask about our Cannabis Guide. At Brown Investors, we seek to provide financial literacy and advice to everyone, regardless of their income, to help them achieve financial freedom.
If you'd like to learn more about who we are, and how we can help you, please contact us today!