With the development and growth of the marijuana industry, investing in marijuana has become a more stable venture for many people. In fact, many states have started to legalize both the recreational and medicinal use of this herb. Investing in marijuana stocks at an early stage allows you to maximize the returns you may get from your asset. Now, the challenge is determining whether investing in the marijuana industry will increase your asset portfolio’s worth in the long run. Here are some of the things to know about investing in marijuana stock.
In this article:
- The Short-Term Gains of Investing in the Marijuana Business
- Growth in the Industry
- Cost of the Product
- Potential Downsides of the Investment
- Is Marijuana Investing a Benefit for Your Portfolio?
Investing in Marijuana: How Beneficial Is It?
The Short-Term Gains of Investing in the Marijuana Business
The first consideration for any investment is the market conditions. Short-term gains over the last year offer an idea of potential trends in a booming industry. Marijuana stocks, including marijuana penny stocks, provide limited information because the substance has been legal for only a short time.
This made many people skeptical about investing in marijuana penny stocks. In fact, marijuana is still illegal in some states, which affects the industry’s potential growth. However, some companies offer it, such as GW Pharmaceuticals and Scotts Miracle-Gro. This gave investors the option to venture out and start investing in marijuana companies.
For short-term investment tactics, investing in medical marijuana stocks shows a positive trend. In 2017, the stocks grew by roughly 90%. The high returns suggest such stocks may help with your portfolio growth. Factors such as growing interest rates and cost of production all make a huge impact on stock prices. In addition, with more and more people investing in the marijuana industry, stock shares may continue to rise both in the short and long-term horizon.
Growth in the Industry
Growth in the marijuana business is another factor that can benefit your portfolio. Investing in medical marijuana could be beneficial due to its potential growth. States are legalizing medical marijuana and allowing people to use the substance with a prescription. Similarly, investing in recreational marijuana may also be an option as more and more states are now allowing people to use it aside from medicinal purposes.
As more states legalize marijuana, the industry will continue to grow. This potential growth is beneficial to investors who have started investing in legal marijuana. The market is not yet saturated, and there’s plenty of room for stock shares to skyrocket.
Cost of the Product
The cost of marijuana impacts stock prices. Marijuana is not a low-cost buy. The plant has a high-profit margin. It does not cost much to grow the plant. Companies buy a pound of the plant at roughly $3,000 and then extract parts of the plant to sell to their customers.
By extracting the oil from the plants, the company makes a profit. Generally, a company sells a single cartridge for a specific price, usually around $70. A pound of marijuana makes enough cartridges for over $9,000 in sales. This means the plant has a profit margin of roughly 200%.
Because marijuana has a high-profit margin, companies will see a positive impact on their sales. Marijuana buds are a low-cost purchase. Processing and preparing a product for consumers does not cost much. If the company grows the plant, it has a higher profit margin.
The cost of the final product is high compared to the cost of the initial supplies. Removing the cost of employees from the profit margin, the company still maintains a high level of profitability.
With continuous development in marijuana production, investors can now look into investing in marijuana farms as a steady long-term venture. Since the market is still budding, chances are more and more marijuana farms will open in the next few years.
Potential Downsides of the Investment
The downside of investing in marijuana stocks is the legal challenges. State governments are legalizing cannabis for medical marijuana and recreational use. However, the federal government still considers it a schedule-1 drug. This means the government considers the substance dangerous.
The federal government’s classification of the substance creates a potential problem for investors. Until the government makes a change, companies have limited opportunities to go public. As long as the government considers marijuana a class 1 drug, FINRA will prevent public trading.
Because marijuana is not traded publicly, investing seems challenging. Investors use reverse mergers to invest rather than public stocks. It is not as easy as buying a stock. You must follow different standards and you cannot trade easily.
The last downside to consider is the potential of investing in a scam. Because marijuana is not traded publicly due to FINRA standards, you must use caution when making purchases. Scam artists take advantage of the confusion, so you may find yourself investing in a scam.
Is Marijuana Investing a Benefit for Your Portfolio?
The pros and cons of marijuana investing can help you make investment decisions. Should you invest in cannabis? It depends on your risk tolerance. The complexity of being involved in a scam and the limited opportunities for trading mean your investment can be at stake. However, you also have the potential for a high return.
In most cases, it is best to wait until FINRA allows public trading. By waiting to buy marijuana stocks or investments, you avoid financial mistakes and high-cost complexities. If you decide to invest, use caution with your purchase. Evaluate each company carefully and verify data to limit the marijuana investing challenges involved. You also want to focus on big-name companies rather than start-up options.
If you decide to wait, expect marijuana stocks to move into pharmaceuticals. In many states, the substance is legal for medical use. Recreational marijuana is not legal in most states. Due to the use of cannabis in medicine, drug companies will get involved in the marijuana industry.
As with any asset, investing in marijuana is a complex, yet potentially high-yielding move. Because more states are now making the herb legal, marijuana will have more opportunities to grow as an investment option. The challenge is finding legitimate companies for your investments. If you want to take a conservative approach, you can opt to invest in other options while waiting for the government to fully legalize marijuana. However, keep in mind that as the complexity of an asset decreases, so do the potential returns it may yield.
Is investing in marijuana among the options you are considering for investments to add inside your IRA? Please share your thoughts in the comments section below.
Editor’s Note: This post was originally published on March 7, 2018, and has been updated for quality and relevancy.