How to invest in cannabis stocks

The global cannabis market is growing like a weed. According to Grand View Market Research, the value of the global legal cannabis market is expected to reach $91.5 billion by 2028, increasing at a compound annual growth rate of 26.3%. With this impressive growth expected, it's no wonder so many investors are interested in owning cannabis stocks.

What is the best approach to investing in marijuana stocks? Follow these seven important steps to become a successful cannabis investor.

Here's everything you need to know about each of these seven steps.

1. Understand the different types of marijuana products.

1. Understand the different types of marijuana products.

There are two main categories of cannabis products.

• Medical cannabis: Medical marijuana, which is cannabis used for medical purposes, is legal in 36 states and the District of Columbia in the United States and in more than 40 countries. Patients typically need a prescription from a licensed health care provider to obtain medical marijuana. Medical marijuana is frequently prescribed to adults for anxiety, depression, pain, and stress.
• Recreational marijuana: Eighteen US states and Washington DC have legalized recreational marijuana for adults. Recreational cannabis is also legal in Canada, Georgia, Malta, Mexico, South Africa, and Uruguay.

2. Learn about the different types of marijuana companies.

2. Learn about the different types of marijuana companies.

There are three main types of companies in the marijuana industry:

• Cannabis growers and retailers: These companies grow cannabis (often in indoor facilities or greenhouses), harvest the crop, and sell the final product to customers. Some operate retail stores that sell medical and/or recreational cannabis.
• Cannabis-focused biotech companies: Some biotech companies are participating in the cannabis industry by extracting cannabinoids from marijuana to develop new medicines.
• Providers of ancillary products and services: Although these companies do not touch the plants, they support the marijuana industry by providing products and services such as hydroponic products, lighting systems, packaging materials, and management services.

3. Understand the risks

3. Understand the risks of investing in the marijuana industry.

Investing in any type of asset involves some degree of risk. Investing in marijuana stocks involves certain additional risks that need to be clearly understood.

• Legal and political risks: Marijuana sales remain illegal at the federal level in the United States Additionally, U.S. federal law imposes severe restrictions on banks that handle marijuana-related businesses. As a result, it has become difficult for U.S. cannabis businesses to access critical financial services. Although political support for federal legalization or decriminalization of marijuana is increasing, there is no guarantee that either measure will come to fruition.
• Imbalance of demand and supply: Marijuana, a fast-growing industry in the agricultural sector, is particularly prone to irregularities in supply and demand. Canadian marijuana producers initially embarked on a major expansion effort to increase production capacity to meet the demand for recreational marijuana. Some companies have since cut production as Canada's cannabis supply exceeds demand, driving prices down and reducing profits.
• Over-the-counter (OTC) inventory risks: Many cannabis companies trade on the OTC market. This means they do not have to regularly submit financial statements, which are important to investors who want to assess the risk of stocks. Companies that engage in OTC trading are not required to maintain a minimum market capitalization, which can reduce liquidity and make it difficult to trade cannabis stocks.
• Financial constraints: Many participants in the cannabis industry are unprofitable growth companies and face the prospect of running out of cash. They often raise capital by issuing new shares, which dilutes the value of existing shares. Even with this dilution, financially constrained marijuana companies may struggle to obtain sufficient capital to operate successfully.

4. Know what to look for

4. Know what to look for in top marijuana stocks.

When considering your marijuana inventory, you should:

• Investigate management.
• Understand the company's growth strategy and competitive position.
• Examine the company's financial statements.
• Find out how many warrants and convertible bonds the company has issued. A high number on a percentage basis could mean that the stock could be significantly diluted in the future, causing the stock price to decline significantly.

For marijuana cultivation companies, specific indicators to look for are:

• Total cost of goods sold per gram: The company's total cost per gram of cannabis production.
• Cash cost per gram: A company's total cost per gram of cannabis production, excluding costs associated with depreciation, packaging, and inventory adjustment.

You can seek out and prioritize marijuana growers with low cost structures, as they tend to be the most competitive.

5. Evaluate the top cannabis stocks and ETFs.

5. Evaluate the top cannabis stocks and ETFs.

Now comes the fun part. Let's dig into the top marijuana companies. You might also want to check out an exchange-traded fund (ETF) that focuses on marijuana.

Below is a list of top marijuana stocks to thoroughly consider. Please note that this collection is not comprehensive and only includes marijuana stocks with a market capitalization of at least $200 million.

Here are some marijuana ETFs you should consider adding to your portfolio.

6. Invest in your favorite cannabis companies.

6. Invest in your favorite cannabis companies.

Investing in marijuana companies is not suitable for everyone. For some investors, especially conservative investors, the best approach is to avoid these types of stocks altogether. Only investors who understand and can tolerate the high level of risk should add cannabis companies to their portfolios.

Even if you're an active investor, it's unwise to devote too much of your investment portfolio to one marijuana stock or ETF. Consider starting with a small position in marijuana stocks and increasing your holdings as the cannabis market grows and your company's revenues and profits increase. Once your investment thesis is confirmed, your investment will be less risky, but if the company performs poorly, you will need to reevaluate your investment assumptions.

When choosing which cannabis stocks to buy, keep in mind that some stocks are definitely safer than others. For example, Scotts Miracle-Gro, which has historically sold lawn and garden supplies, derives much of its revenue from outside the cannabis industry. Therefore, the company doesn't face many of the risks typically associated with cannabis products and may be a better choice for more conservative investors.

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7. Monitor changing trends in the marijuana industry.

7. Monitor changing trends in the marijuana industry.

Investors are typically encouraged to take a long-term view when purchasing stocks, but the dynamics of the marijuana industry are changing rapidly. The criteria you should use today to make stock purchase decisions could change dramatically in just a few months.

Investors in the marijuana industry, along with the industry as a whole, should closely monitor the marijuana stocks and ETFs in their portfolios. Some changes are beneficial, such as when the U.S. federal government loosens marijuana laws, while others are devastating.

The global cannabis industry has the potential for tremendous growth, but it may not happen evenly or predictably. Following his 7 steps to investing in marijuana stocks will help you navigate investing in this exciting and challenging industry.