How to invest in the cannabis industry

The marijuana industry is drawing more attention than ever before thanks to legislative changes in the US and Canada. So, we’ve taken a look at how to invest in cannabis stocks and ETFs, or trade on their price movements.

Marijuana stocks Source: Bloomberg

As more states and countries legalise cannabis – fuelled by greater acceptance from the public – there’s reason to believe that the marijuana sector’s prospects for continued growth look good.

In fact, research suggests that the US legal marijuana industry could be worth as much as $75 billion by 2030.1 With forecasts like these, it’s no wonder that savvy traders and investors have been flocking to the market, eager to capitalise on the latest trending marijuana stocks.

How to invest in marijuana stocks

Whether you decide you want to invest in marijuana stocks, or trade on their price, there are a variety of steps to consider before opening your first position:

  1. Understand the different types of marijuana products
  2. Learn about the types of cannabis stocks
  3. Understand the risks of trading or investing in cannabis
  4. Choose the asset you want to focus on
  5. Decide if you want to trade or invest in marijuana stocks
  6. Pick your style and set your timeline
  7. Open and monitor your position

Understand the different types of marijuana products

Broadly, there are two types of marijuana products that are fuelling the growth of the cannabis industry: medical and recreational marijuana.

Most companies are involved in the production and development of medical marijuana – either the unprocessed plant or products containing the cannabinoids found in the plant.1 These are believed to alleviate the symptoms of diseases such as Alzheimer’s, cancer, epilepsy and multiple sclerosis.

The second classification of cannabis product is recreational cannabis – marijuana not used for medical purposes. If more countries follow Canada’s lead and legalise recreational cannabis, there is the possibility that more companies will focus on this area of the market.

Learn about the types of cannabis stocks

Depending on which type of marijuana product you want to focus on, there are a variety of different types of companies that you can look in to. The three main categories of marijuana stocks are:

  • Growers: the companies that cultivate, sell and distribute cannabis to consumers and businesses. Due to legal constraints, US-based growers are not large players in this space. However, some Canadian growers have had relatively substantial market caps since the legalisation of cannabis in October 2018
  • Biotechs: these firms are dedicated to developing and bringing medical marijuana products to market. Although they do not always work with cannabis at all, since many of their drugs consist of synthetic forms of the substance, biotechs are still often counted as marijuana stocks
  • Supply providers: these companies do not grow or use any element of cannabis – real or artificial – in their products. Instead, these businesses provide all the tools and materials that are needed to physically grow marijuana, such as light systems, hydroponics, special soils and fertilisers

Understand the risks of trading or investing in cannabis stocks

The growth of the cannabis industry is relatively recent, and the sudden interest in the sector has led to valuation risks. Cannabis stocks have increased in price so rapidly that the valuations do not necessarily reflect the company’s growth prospects and profitability. There is a lot of talk about the future of the cannabis industry, which is potentially causing a lot more excitement than the current state of play deserves.

The best way to mediate the risks of marijuana stocks is to do your research and identify which marijuana-linked assets are the riskiest. For example, Canada-based marijuana companies do not face all of the same risks as those within the US industry, due to the legal landscape.

It is also important to understand that each investor and trader will have different financial goals and risk tolerances. While some individuals might not be interested in the volatility of marijuana stocks, others might be more comfortable in higher-risk circumstances.

Choose the asset you want to focus on

Before you start to trade or invest in the marijuana industry, it is important to do your research and carefully select which type of asset is best suited to your goals. There is one way to gain exposure to the marijuana industry: stocks

Cannabis stocks

Cannabis stocks are the shares of publicly traded marijuana companies. These companies previously struggled to be accepted by stock exchanges, but since the move toward legalisation there are now cannabis stocks on the New York Stock Exchange (NYSE), the NASDAQ and the Toronto Stock Exchange (TSX).

Five of the most talked about marijuana stocks include:

  • Canopy Growth Corp (CGC): a research and development-focused cannabis company, which listed on the NYSE in May 2018
  • Cronos Group (CRON): a cannabis grower and distributer that listed on the NASDAQ in March 2018
  • Aurora Cannabis (ABC): a cannabis producer, initially listed on the TSX with a subsequent listing on the NYSE in October 2018
  • Tilray Corp (TLRY): a pharmaceutical company and cannabis grower, which was the first cannabis firm to list on the NASAQ in July 2018
  • HEXO Corp (HEXO): a company focused on the creation and distribution of cannabis to the recreational market. It listed on the TSX in June 2018

Take an in-depth look at the top marijuana stocks to watch

Decide if you want to trade or invest in marijuana stocks

There are is one route to the financial markets: trading. Your decision of whether to trade on their price should be based on your needs and preferences.

Trading marijuana stocks

If you decide to trade marijuana stocks is one main ways to trade: trading CFDs.

You could trade contracts for difference (CFDs). When you trade a CFD on a marijuana stock, you are agreeing to exchange the difference in the price of the marijuana stock between when the position is opened and when it is closed. CFDs are particularly useful for hedging existing positions in your portfolio.

Two of the marijuana-related stocks that you can trade CFDs on are:

  • GW Pharmaceuticals
  • Cara Therapeutics

CFD trading are leveraged products, which means that you only need to put down a fraction of the value of your position in order to gain full market exposure. Leverage can bring the possibility of magnified profits, but also magnified losses.

Another reason trading marijuana stocks is increasingly popular, is that you can trade on the shares of companies that you believe will fall in value as well as those you believe are going to rise. This provides you with more opportunities to take advantage of volatile markets.

Pick your style and set your timeline

Once you have decided whether to trade or invest, you will need to create a detailed trading plan to establish how you will generate profit, and settle on a methodology for entering and exiting positions.

If you decide to invest in marijuana stocks, it is likely that you will stick to the ‘buy and hold’ method, which involves keeping your position open for a long period of time, often years at a time. But if you decide to trade cannabis stocks there are variety of styles for you to choose from:

  • Day trading is the practice of buying and selling assets within a single trading day, taking quick and frequent profits from small price movements
  • Scalping is a type of day trading that involves the opening and closing of positions quickly – within seconds, or at most a few minutes
  • Swing trading is the practice of entering trades at the point the market is expected to change direction, with the aim of profiting from movements in an asset’s price
  • Position trading involves holding a position over a longer period of time, be it weeks, months or even years, to profit from large shifts in price

Your decision about your trading style will depend on how much time you want to spend monitoring the markets and what your timeline is. Your timeline should cover what your entry and exit points for your positions would be, for example ‘if the marijuana stock falls below X, I will buy, and if it rises above Y, I would sell.’

Open and monitor your position

Now it’s time to take your first position. When you invest in cannabis stocks, you buy the asset in the hope that it will rise in price and you can sell it for a profit. But when you trade cannabis stocks you have the option of ‘going long’ to mimic buying a stock, or ‘going short’ if you think it will fall in value.

When opening your position, it is important to consider how you will prepare for and restrict potential losses – this is known as a risk management strategy.

1 Cowen & Co, 2018

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