How to invest in cannabis stocks

What is the state of the cannabis industry?

Worldwide

Ever since Uruguay legalised the recreational use of cannabis in 2013, the industry has been expanding quickly. Canada fully legalised the drug in 2018, becoming the second country in the world to do so. Since then, countries like Georgia, Malta, South Africa, and Mexico have all fully legalised it.

The opening of the German market and the potential for easier financing access over time could improve conditions for the cannabis industry. However, despite significant price drops in recent years, many cannabis stocks remain expensive, reflecting lofty future expectations. Therefore, investors are advised to conduct thorough due diligence before investing in cannabis stocks.

In the USA, at the time of writing (2024), cannabis is legal in 38 of 50 states for medicinal use and 24 states for recreational use.

Projection

Considering that most countries in the world have not yet legalised cannabis, analysts still believe there is huge potential for the industry to boom in the years ahead. A projection from Grandview Research suggests that revenue from the sector could rise at a compound annual growth rate (CAGR) of 18.1 per cent and be worth USD 73.6 billion by the end of 2027. Other projections have been even more optimistic. For instance, Fortune Business insights anticipate a CAGR of close to 33 percent, which would put the global cannabis market size at USD 97.35 billion by the end of 2026.

Even going on the lowest expectations of analysts, it’s still no surprise that the cannabis industry is attracting interest and investment. But, as with any sector, there is always a risk it will not grow as expected, so it’s important to learn as much as possible about the industry if you are considering investing in it. In the next section, we’ll outline the different subsectors in which you can think about investing.

What subsectors make up the cannabis industry?

Before you invest in the cannabis industry, you need to know all the different subsectors so you can identify where the biggest growth could occur or where the best value stocks can be found. There are three main subsectors that contribute to the overall cannabis industry, and each of these represent slightly different investment prospects. These are:

• Growers and retailers
• Biotechnology companies
• Ancillary marijuana businesses

Growers and retailers

Without growers and retailers, there would be no cannabis industry at all. Investors can choose to buy stocks in established companies or look for start-ups that are beginning to grow cannabis in places where it is legal. An example of a company in this subsector is GrowGeneration, a retailer that is one of the largest hydroponics suppliers that sells soil, lighting, and equipment for both commercial and home growers.

Biotechnology companies

Because more countries around the world are moving towards legalising cannabis for medicinal use first, the biotechnology companies that develop pharmaceutical drugs may be worth paying attention to. In the early days, big pharmaceutical companies were being careful with their approach to cannabis, as it was initially seen as a risky area to get into.

However, this changed in 2019 when the world’s largest generic drug manufacturer, Teva, signed a deal with medical cannabis company, Canndoc, to distribute its products.

With the Israel-based company opting to move into cannabis, it has paved the way for others to follow suit. Opportunities for investments here could arise in deals made between big pharma companies and smaller cannabis drug developers.

Ancillary marijuana businesses

The third subsector focuses on ancillary companies that provide products or services related to the cannabis industry. These could represent anything from eCommerce sites, distribution, growing technology, and various other services.

What are the uses of cannabis that can fuel the markets?

There are two main uses of cannabis - recreational or medicinal. By understanding how the drug is used, you can attempt to identify the areas in which you think there will be healthy financial growth in the years ahead.

Medical

Research has shown that the most common use of marijuana for medical purposes in the USA is for pain relief. It’s mainly used for chronic pain associated with age and is viewed as not being as potentially addictive as opiates.

Recreational

Recreational cannabis use covers people who opt to use the drug for their own enjoyment rather than for medical reasons. This can be done in social settings, or alone, and can be compared to other legal drugs like alcohol. There has already been a rise in cannabis cafes in locations where the drug has been legalised, and it is likely there will be future innovation exploring other business opportunities for the recreational use of the drug.

What do you need to know before investing?

While there are various opportunities to invest in the cannabis industry, there are also risks involved. The sector faces numerous challenges, and it will have to overcome these to flourish and achieve sustainability.

Challenges for the cannabis industry

Shifting landscape

An ever-present challenge for the cannabis industry is the rapidly changing legal landscape. Despite being legalised in various places, the laws are not standard across the board. This means that cannabis companies that want to operate on a wide scale need to adjust their business and marketing model depending on the rules in each location they operate in.

Bigger brands moving in

Smaller start-ups in the industry could be at risk of getting swallowed up or muscled out by bigger, well-established brands from other addiction industries including alcohol and tobacco. There has been an increased interest in the cannabis industry from these sectors and companies like Anheuser-Busch InBev, Pabst Brewing Company, and Constellation Brands have all begun to invest in cannabis-related products.

Risks for investors

As most seasoned investors know, stocks with high potential also come with high risk, so you should do thorough research and use as many sources as possible to help you make informed decisions. Below, we’ve listed a couple of the key risks that could cause major issues for investors.

No guarantee of success

Many companies hedge their success solely on the potential they believe the industry has, even though new start-ups often fail. For instance, some of the early medical cannabis companies were unable to provide investors with information about necessary licences and barriers to entering the industry, and subsequently lost their capital because of this.

Legislation could change

The government legislation is still being streamlined in many of the places that have legalised cannabis, and there could be a chance that some governments backtrack on these new laws.

For example, if new research emerges that suggests cannabis isn’t as beneficial for medical purposes as scientists once thought, governments may stop using it for medicinal purposes.

Likewise, if there are other adverse effects from the legalisation of cannabis over the course of a few years, governments could adjust their laws again. Investors should also be aware of how pricing and taxation could change, how share prices can be inflated if there are high levels of interest; and the risk of dilution as companies try to expand to meet demand.

How can you invest in cannabis stocks?

If you want to invest in cannabis stocks, you can do so with most brokers. Here are some investment instruments you may want to look into:

Cannabis stocks

It’s possible to buy shares or stocks directly in companies that operate within the cannabis industry. These companies can work specifically within the subsectors previously mentioned in this guide. Investing in individual stocks allows you to focus on the share price movements of specific companies.

Cannabis ETFs

ETFs (exchange-traded funds) are investment funds traded on stock exchanges, similar to stocks. A cannabis ETF holds assets in various companies within the cannabis industry, providing diversified exposure to the sector. This can mitigate risk compared to investing in individual cannabis stocks.

If investing in cannabis stocks interests you, make sure you do careful research before you get started so you can make the most informed decisions when you start. There is no doubt that the cannabis industry is one to watch, but there is high risk involved due to the lack of certainty about where it will be in the future.