Legal marijuana is in its infancy. Only four states and the District of Columbia have legalized it for recreational use so far. But many more states are likely jumping on the legal-pot bandwagon soon.
According to TheStreet, the legal marijuana markets generated revenues of $5.7 billion in 2015. That is projected to jump to $22 billion annually starting in less than five years.
What this means for investors and traders in marijuana stocks is that there is the potential for huge gains in what will become a rapidly expanding market. The stocks, however, are risky.
History of Marijuana Stocks
The first publicly traded marijuana stock was Medical Marijuana Inc. (OTC: MJNA), which began trading in April, 2009. The company produced a payment system for medical marijuana sales. It was soon followed in the stock market by Cannabis Science (OTC: CBIS) and Cannabis Medical Solutions, Inc., later renamed MediSwipe, Inc.
As more states legalized marijuana for medical, and recreational use, interest in cannabis stock investing took off, and some stocks skyrocketed. In the first three quarters of 2014, cannabis-related stocks were up 665 percent, and cannabis-related biotechnology stocks rose 339 percent.
The next year, though, was a rough one for pot stocks. In 2015, marijuana stocks underperformed the S&P 500 by 44 percent.
In June 2016, investing in marijuana-related companies may have gotten a boost when Microsoft announced it was partnering with Kind Financial, a company that provides services to the marijuana industry, to sell software for marijuana growers.
Best and Worst Marijuana Stocks
One stock that many industry observers recommend taking a look at is GW Pharmaceuticals PLC (NASDAQ: GWPH). It is a British company that developed a treatment for multiple sclerosis called Sativex that is made from the cannabis plant. The company is larger and more stable than most cannabis-related companies.
On the downside, a number of marijuana stocks that were trading over the counter have been delisted. Many of the companies were believed to be pump-and-dump schemes, or to be little more than a series of press releases.
Things to Consider
While marijuana-related stocks might see explosive growth, they are also extremely risky. Investors should keep the following in mind:
- The industry, unfortunately, seems to attract scammers. Investors should thoroughly research companies before buying stock to make sure the companies are legitimate and are actually in operation, not just in the planning stages.
- Many marijuana stocks are “penny stocks,” which are inherently risky because they have a low market cap and are thinly traded.
- Because marijuana is not yet legal under federal law, large investors are likely to avoid marijuana-related stocks until federal law changes.
- You don’t have to invest directly in marijuana itself to invest in the industry. Many companies are springing up now that provide various services and products to the industry. These range from providing financial services to manufacturing. There are even cannabis industry trade shows now, which would be a good place to find out more about the variety of companies. Investing in related products can be a very successful strategy. It is the same strategy that people used when they invested in pans during the gold rush.
Marijuana stocks have been on a roller-coaster ride since their inception. Some people have made a lot of money with well-timed trades, but others have lost everything. The most prudent course is to only invest money that you can afford to lose.
The news is not all bad, though. Buy-and-hold investors who are patient enough to hold on until federal legalization could see a potential 100-fold profit in three to five years, Eddie Miller, CEO of InvestInCannabis.com, told TheStreet.
With greater risk comes greater potential rewards. There is no question that the marijuana industry is on the verge of explosive growth. Just make sure you do your due diligence before purchasing any stock, and try to tune out the hype.