Investing in cannabis has gained a lot of traction so far this year. Cannabis stocks made headlines in January as prices jumped when democrats in the US took control of the Senate with hopes that the Biden administration would push for federal decriminalisation. In February, cannabis stocks were again in the spotlight because they caught the attention of Reddit users on the infamous WallStreetBets forum. On top of this, many countries and states, such as Mexico and New York, have either legalised cannabis or have plans to do so in 2021.
Have you thought about adding cannabis to your portfolio? Keep reading to find out about this growing industry and ways you can invest in it.
The cannabis industry
Cannabis has been used medicinally and recreationally for thousands of years. However, many countries banned the drug in the first half of the 20th century. In recent years, countries and numerous US states have legalised medical marijuana, and some have even legalised recreational use. The legalisation of cannabis has opened the door for investment opportunities.
According to Research and Markets, the value of the global cannabis market in 2020 was an estimated $20.5 billion, and it is projected to grow to $90.4 billion by 2026. The research firm reported that North America is the largest cannabis market, and Europe is expected to be the fastest-growing market in the next five years.
How to invest in marijuana
Two of the main ways to invest in cannabis are through stocks or exchange-traded funds (ETFs). Similar to other ETFs, with cannabis ETFs, you gain exposure to various stocks or financial products within this industry. For example, the Medical Cannabis and Wellness UCITS ETF (IE00BG5J1M21), the first cannabis ETF to launch in Europe, consists of companies with business activities in medical cannabis, hemp and CBD.
Types of marijuana stocks
When investing in cannabis stocks, it is important to understand the two broad markets within the industry: medical cannabis and recreational cannabis. Companies in the medical market are involved in the research and development of cannabis products to treat certain health conditions. On the other hand, companies in the recreational cannabis market focus on products for personal enjoyment.
In the cannabis market as a whole, there are three main categories of companies related to different parts of the industry:
- Cannabis growers: Companies that cultivate and grow marijuana (i.e., Tilray, Sundial Growers).
- Cannabis-focused biotechs: Companies that make cannabis-derived prescription drugs (i.e, GW Pharmaceuticals, Tetra Bio-Pharma).
- Ancillary service and product providers: Companies that provide products and services to others in the industry, including lighting systems, packaging, professional services, accessories, technology, security and more (i.e., Scotts Miracle-Gro, GrowGeneration).
Most traded cannabis stocks
The top-three most traded cannabis stocks via our platform from 01.01.21-13.04.21 were:
Risks of investing in cannabis
While the cannabis industry has the potential to grow, especially as more countries legalise it on some level, there are many risks involved. Some risk factors to consider are:
- Relatively new industry: Since the cannabis industry has not been around that long, there are unique risks that may arise. Companies in this space are young and have not yet stood the test of time.
- Volatility: Cannabis stocks are known to be volatile. Stocks in this sector can be highly sensitive to new developments in the industry, such as loosened legal restrictions, or analysts’ opinions.
- Valuation risk: Due to price volatility, a sudden interest in the sector, and the relative newness of the industry, a cannabis stock’s valuation, in some cases, can be inflated.
- Foreign stocks: As many cannabis companies are either Canadian or American, risks such as currency fluctuations may arise.
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The information in this article is not written for advisory purposes, nor does it intend to recommend any investments. Please be aware that facts may have changed since the article was originally written. Investing involves risks. You can lose (a part of) your deposit. We advise you to only invest in financial products that match your knowledge and experience.
Sources: Bloomberg, Motley Fool, BBC, Business Insider, Research and Markets, Leafly, HANetf, NerdWallet