What You Should Know Before Investing In Marijuana Stocks

Marijuana Stocks

About 10 years ago, the idea of legally investing in businesses that produce marijuana would have been unusual for many, and unthinkable for longtime investors. But the cannabis industry has turned new corners in recent years as more and more of Main Street have explored its uses. The push has been going on for some time to use marijuana for medical purposes, but many states and now Canada have also legalized recreational use for it creating new market opportunities and even chances for Wall Street to cash in on it. If marijuana piques your interest as an investor, there are ways you can get into it if you know what to look for.

Do Your Due Diligence On The Marijuana Company's Cash Flow

The main thing to remember is that right now, the marijuana market is highly volatile just as cryptocurrency has been in its early stages. That shouldn't discourage you because many markets were volatile or had bubbles including the e-commerce market where Amazon dominates today. But that does mean that you should be careful which company's stock you buy because you don't want to make overly risky investments. Sticking to regular stock exchanges when you buy stock and looking for companies like Constellation Brands Inc. (NYSE: STZ) is a recommended way to do it because these are companies that are usually more stable financially. Daniel Smoot, an associate editor for Money Morning says, “While Constellation Brands is diverse within itself, you'll still want a variety of cannabis stocks to balance out your portfolio. This means investing in companies that grow, cultivate, and produce recreational and medicinal marijuana products like Canopy Growth. CGC is a massive marijuana producer with a market cap of $7.2 billion.”

Know What The Company Specializes In

Marijuana companies specialize in different things from growing weed, to patenting new cannabis based products, and other wholesale activities. You might find that companies who grow and supply marijuana are doing better than those who sell it on the market or simply include it as one of their marquee products. But again, their finances matter as does their overall market size and global reach.

Consider Buying Stocks Through ETFs

As with other stocks that investors may not be ready to buy outright without getting quality insight into the company, sometimes mutual funds and ETFs are a better way to buy into marijuana stocks. Again, the marijuana stock market is still a novelty, so there are very limited ETFs to invest in. But one particular ETF, ETFMG Alternative Harvest (NYSEMKT:MJ) is a fairly diversified ETF where you can buy into the stocks of multiple marijuana producers and wholesalers in the US. There are also smaller ETFs that can allow you to buy shares of companies in Canada and other North American regions. But keep in mind that though you may be taking a little less risk than directly buying the shares of lesser known companies, some of those companies are included in these ETFs which could mean less growth or loss to your portfolio. Some marijuana ETFs also charge a little more on their asset management fee.

Also Look At REITs With Connections To Cannabis

You might wonder what in the world a real estate investment trust (REIT) has to do with the marijuana market. Well just as regular companies have to lease commercial space from property management companies, marijuana companies have to do the same thing. And there are REITs out there who are currently doing just that. Of course, the value of the REIT shares does depend on how well the marijuana company performs. But if they are performing well, owning an REIT of the property they lease essentially does give you a slice of the pie, and don't forget most REITs pay dividends since they have to pay out 90% of their income.

The bottom line is there is more than one way to invest in the marijuana market beyond just simply buying marijuana stocks. Just remember though that most of the current companies in the industry are currently volatile and you have to carefully weigh the risks of getting in.