Marijuana stocks are dope, the industry’s growing like a weed — take your pick of jokes. But with marijuana now legal in some form in dozens of U.S. states, many investors are eager to buy into this burgeoning industry.
Marijuana (or cannabis or pot) stocks have been called “the new bitcoin” because of frenzied investor interest and some wild price swings in 2018. Some investors want to get in early, despite the risks, hoping that it’s like buying shares of now-hot companies like Amazon in their early days. But there are practical differences with this industry and some real risks to consider. Here’s what you need to know to buy marijuana stocks.
Why marijuana stocks are unique and risky
A stock’s a stock, right? Definitionally, sure: You’re buying shares of ownership in a publicly traded company. But marijuana stocks carry some additional challenges and risks, including:
- Relatively new industry. Marijuana legalization beyond medicinal purposes began in 2012. As a result, many marijuana stocks are very small, falling into the category of penny stocks, which is a risky arena for investors, especially beginners. Young companies are at higher risk of going out of business, their stocks can experience wide price swings, they may trade less frequently (making it harder to sell when the time comes) and there’s less publicly available research for would-be investors. Finally, with marijuana not yet legal on a federal level, there could be enforcement threats in the future.
- Speculative bet. For all the above reasons, marijuana stocks should be considered speculative investments at this point. Don’t invest more than you can afford to lose.
- Potential scams. Many people are eager to make money in the weed industry, including scam artists. The Securities and Exchange Commission has issued alerts specific to marijuana stocks, warning investors of potential investment fraud (unlicensed sellers, promises of guaranteed returns, unsolicited offers) and market manipulation (including trading disruptions and fake press releases meant to influence prices).
Don’t invest more than you can afford to lose.
- Foreign stocks. A majority of cannabis companies trading in the U.S. are Canadian, and they’re also among the largest. These companies include Canopy Growth, Aurora Cannabis and Tilray, which all focus mostly on medical marijuana. When venturing abroad in your portfolio, there are some additional risks, including more limited access to financial data, such as research or company reports, than what’s required in the U.S. and potentially no legal recourse if an investment’s fraudulent.
- You may need a do-it-yourself approach. Because marijuana is illegal federally, many banks are reluctant to touch this industry. As a result, some investment professionals, such as advisors or portfolio managers, won’t be able to recommend marijuana stocks to their clients. (To purchase them on your own, see our step-by-step guide for how to buy stocks.)
Do pot stocks deserve a spot in your portfolio?
Just because you can buy cannabis stocks doesn’t mean you should. You’ll need to assess your investing goals, current holdings and how comfortable you are with the risks. Make sure you won’t need to touch any money you plan to invest in these stocks for at least five years — and don’t forget about their speculative nature.
Marijuana stocks shouldn’t make up the bulk of your portfolio, nor should any other single stock. Rather, diversification, a mix of different assets, is key to long-term investing success. We recommend you dedicate no more than 10% of your portfolio to individual stocks and focus instead on low-cost index funds such as mutual funds or exchange-traded funds.
Marijuana stocks shouldn’t make up the bulk of your portfolio, nor should any other single stock.
As with any new investment, dedicate several hours to researching prospective pot stocks, including how the company makes money, the long-term investment merits and what makes the stock price go up or down. (New to this? Consult our guide on how to research stocks.)
Individual stocks aren’t the only option for would-be marijuana investors. There are a handful of marijuana ETFs available to U.S. investors, and they may be attractive if you don’t want to do stock-specific research. Two of the largest are the Horizons Marijuana Life Sciences Index ETF (ticker HMMJ) and the ETFMG Alternative Harvest ETF (ticker MJ). But the industry’s broader risks don’t disappear: Marijuana ETFs also experienced some wild price swings in 2018.
Open a brokerage account
You’ll need a brokerage account to buy marijuana stocks. You shouldn’t have trouble finding most of these stocks available among NerdWallet’s picks of the best brokers for penny stock trading. It takes about 15 minutes to open a brokerage account, a process that’s similar to setting up a checking or savings account.
A majority of marijuana stocks currently available to U.S. investors are traded over-the-counter, meaning they’re not listed on major exchanges like the New York Stock Exchange or Nasdaq.
If you don’t plan to dabble in penny stocks beyond marijuana stocks, consider our picks of the best brokers for online stock trading. Double-check that the stock or ETF you’re eyeing is available through these brokers, and remember the big picture. Choose a broker that offers a variety of investments — including ETFs and mutual funds — and has low commissions, useful educational tools and high-quality customer service.
Become a marijuana investor
When you’ve assessed the risks, done your research and narrowed down the options, you’re ready to buy. Just like any other stock or ETF, the price is determined by what’s called a bid-ask spread, or the difference between what buyers want to pay and sellers are willing to accept.
A majority of marijuana stocks currently available to U.S. investors are traded over-the-counter, meaning they’re not listed on major exchanges like the New York Stock Exchange or Nasdaq. While you can buy these stocks through most brokerage firms, there may be additional fees or account minimums to do so.
Finally, review your order before hitting the “buy” button. And with that, you’re an investor in the marijuana industry.