Key Investment Risks in the Cannabis Market

Once you’re investing concept is validated, the investment becomes less hazardous. Instead, you should reconsider your investment assumptions if the business performs poorly.

Fremont, CA: While investors are generally encouraged to take a long-term view when buying equities, the marijuana industry is evolving rapidly. The criteria used to evaluate stock purchases today may shift considerably in just a few months, reflecting the industry's fast-changing landscape.

There is some risk involved with investing in any asset. You should be fully aware of the following additional unique risks when investing in marijuana stocks:

Legal and Political Risks

Marijuana sales are still prohibited at the federal level in the United States. Banks that deal with marijuana-related enterprises are subject to tight regulations under U.S. federal law. Consequently, it is challenging for cannabis companies operating in the United States to obtain essential banking services. Marijuana legalization at the federal level has gained political support, but this does not mean it will happen.

Supply and Demand Imbalances

Marijuana, a growing industry within the agricultural sector, is especially vulnerable to fluctuations in supply and demand. To accommodate the demand for recreational marijuana, Canadian growers first launched significant expansion projects to boost production capacity. Since Canada's cannabis supply exceeded demand, some businesses later reduced output, which hurt income and caused prices to drop.

Over-the-counter (OTC) Stock Risks

Numerous cannabis businesses engage in over-the-counter trading. This implies that they are exempt from the requirement to submit financial statements on a regular basis, which is crucial for investors wishing to evaluate a company's risk. Additionally, OTC traders are exempt from minimum market size requirements, which may lead to poor liquidity and make trading cannabis stocks challenging.

Financial Constraints

Many businesses in the cannabis sector are expanding but not making a profit, and they may soon run out of money. To raise money, they frequently issue new shares, which lowers the value of the current shares. Financially strapped marijuana businesses may find it difficult to secure sufficient funding to function effectively even with this dilution.

Not everyone is a good fit for investing in cannabis businesses. The wisest course of action for some investors—especially conservative ones—is to stay away from these equities completely. Cannabis companies should only be included in the portfolios of investors who are aware of and able to withstand high levels of risk.

Investing too much of your portfolio in a single marijuana stock or exchange-traded fund (ETF) is a bad idea, even for aggressive investors. When the cannabis industry expands and the company's earnings and revenue rise, think about beginning with a small stake in a marijuana stock and growing it over time.