Investors can see significant potential gains for CBD companies, but heeding marijuana investments challenges should also form part of any investing strategy.
In this article:
- Legal Risks and Possible Rewards | Federal Level
- Financial Risks Due to Legal Limitations
- Get Rich Quick Schemes
- The Macro-Financial Environment
- How To Invest In CBD Inside Your IRA
Marijuana Investments Risks and Rewards
Legal Risks and Possible Rewards | Federal Level
These risks and rewards are two-sided. The first side looks at the federal level of legal status, while the second one looks at the state and individual level for investment opportunities that lie in cannabis companies.
Perhaps the most significant complication for the whole weed industry, legislation plays a crucial role in the acceptance of marijuana. While public sentiment is mostly optimistic and accepting of legislation for recreational marijuana and medical cannabis, politics might not always reflect that of the constituents.
There is good news for those who are looking forward to the legalization of the cannabis industry. Some hardliners against the legal acceptance of cannabis have changed their views.
Politicians changing their viewpoints are not rare. Some key positions, like the attorney general, have an immense influence on the implementation of such rules. This was why the faction pro legalizing marijuana celebrated the replacement of Attorney General Jeff Sessions, who is known for his anti-marijuana stance.
Retail investors also have another cause for celebration: On the day Jeff Sessions stepped down, marijuana stocks saw their stock price rise, with the NASDAQ Alternative Marijuana ETF seeing a one-day 5 percent increase.
Interestingly, projections of business analysts have been preaching the excellent benefits of marijuana legalization. The cannabis industry can reap tax revenues of $130 billion by 2025.
However, like any kind of political concern, the mindset for legalization may change. Currently, only 11 states plus D.C. have accepted the recreational use of marijuana.
For medical marijuana, 33 states plus D.C. offer the therapeutic benefits of cannabis through the business sector, mainly through marijuana dispensaries.
A country that has quite the significant influence on US cannabis stocks is Canada, which just recently legalized the cannabis business (both medical and recreational marijuana). Like the US market, federal and provincial laws have different effects, but nationwide marijuana acceptance made investing in the cannabis industry generally easy to understand.
A lot of cannabis companies in the NYSE and NASDAQ have Canadian counterparts or parent companies. The legalization of the cannabis market in Canada offers great potential for international trade, which further increases the profitability of the marijuana business.
Marijuana investments can also see high growth when more states legalize the use of cannabis. While medical cannabis legalization is just a matter of when and not if, recreational cannabis has a long road ahead.
Financial Risks Due to Legal Limitations
While both institutional investors and individual IRA holders can see the enormous investment potential of marijuana stocks, the capability to get such shares may see some limitation.
For those who have strict 401(k) or IRAs, investors may have difficulty getting cannabis stocks. Due to its status as a new industry, most marijuana companies are nanocap stocks, which are companies whose market capitalization is between $50 million to $300 million.
Nanocap stocks are prone to manipulation by a whale, which is what Wall Street calls investors with large wallets and shares and who can move the stock price however they please.
Nanocap stocks also do not have stringent requirements to report. This lack of information can lead to speculative activity, which can lead to significant losses.
To combat such manipulation, FINRA and other regulatory bodies usually mandate the institutional investors, brokers, and other entities to provide disclaimers.
Conventional IRAs and 401(k)s may also not accept marijuana stocks which trade over the counter and not in a significant stock exchange.
For investors eager for marijuana investments, going with a self-directed IRA may give the most options. Self-directed IRAs have good benefits as well, so placing marijuana stocks and other assets can give a boost to retiring comfortably.
Get Rich Quick Schemes
Like any new and emerging sector, the marijuana business has its share of scammers that taint its reputation. While scams are the exception rather than the norm, there have been enough incidents to push the SEC to alert investors about scams in marijuana companies.
Some investors in cannabis companies have enjoyed tremendous growth, both in revenues and capital gains. However, this kind of news usually leads to greed.
Where there is greed, unscrupulous people will take advantage of the misinformed or ignorant public for their gain. Crackdowns on such scams are a continuous operation, but investors should arm themselves with market knowledge to protect their retirement accounts.
If you see a company promising to grow your capital many times over in a very short period of time, then it might be good to run away as fast as you can. Any real investment offers both risks and rewards, and emphasizing the rewards while downplaying or even hiding risks can spell trouble.
Investors should also only invest what they can afford to lose. Investments should come from disposable income, not because there are scams, but because it makes good financial sense.
The Macro-Financial Environment
In a bear market, bulls get slaughtered. In a bull market, bears get trampled.
Going with the herd with your investments can produce great growth, until the trend changes and your portfolio tanks.
That is why it is essential to read about what is currently happening, not just in the financial world, but also in related sectors.
For example, retail giants are closing down malls due to losses, but online shopping is growing, which benefits the tech sector.
As of now, the green wave of cannabis legalization is lifting marijuana companies. However, when a state rejects positive affirmation of weed’s legal status, some marijuana stocks take a beating.
Listening to the pulse of the market is easier said than done, so reading informational material is always a good choice.
The risk of the financial world is also the source of profits, though. So, investors who want to protect their portfolios should take notice of what is going on in the financial world.
Investors can use the two principal analyses, fundamental or technical analysis, to get a feel of the market.
Fundamental analysis uses cash balances and business operations for projections to choose which company to invest in.
Technical analysis uses patterns and tools, like a Moving Average or a Stochastic Oscillator, to project where the price of stocks will go.
You can also use both at the same time for deciding the allocation of investments. Formulating an investment strategy can help protect both the principal capital and the gains, so making one should always be the first step.
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Marijuana stocks can give added diversification. Most cannabis companies are either part of biotech corporations or pharmaceutical companies at the same time, so investors can invest in at least two sectors at the same time.
Again, ask if your IRA or 401(k) can accept marijuana stocks. Some cannabis companies trade over the counter and not through stock exchanges, which can turn off custodians.
As with any kind of investment, always do your research first.
Marijuana investments provide both risks and rewards, and savvy investors have already invested years before. However, it is not yet too late to ride the green wave, but always temper your optimism with facts and a good investing philosophy.
Do you already have marijuana investments in your portfolio? Do you have plans to add more? Let us discuss in the comments section below.