At first glance, the cannabis industry appears to be a vibrant spectacle brimming with enthusiasm, flamboyant personalities, and abundant greenery. However, a more detailed examination unveils a labyrinth of evolving regulations, financial potential alongside uncertainties, a mixture of exasperation and optimism, and social and financial equity issues. 

Consequently, those considering launching a cannabis business or those wanting to provide services to cannabis companies should prudently evaluate what truly necessitates not merely entering this industry but thriving within it.

Cannabis Remains a “Schedule I Drug” in the U.S.

Under U.S. federal law, cannabis shares the “Schedule 1 drug” status with substances like heroin. This causes a sense of apprehension among numerous banks and financial institutions towards associating with the cannabis industry. The majority of cannabis businesses, due to constraints in accessing key banking services such as establishing credit lines or checking accounts, are often compelled to operate solely on a cash basis.

Investors must be cautious as this scenario presents considerable financial security risks. As per Nasdaq, the ambiguous legal status of the cannabis industry necessitates unconventional operating methods for these companies. Consequently, investors face potential risks of entanglement with fraudulent entities.

Consider Investing in a Cannabis ETF

For those apprehensive about putting their money in a single cannabis firm, an exchange-traded fund (ETF) could be a dependable substitute. A prime example is the ETFMG Alternative Harvest ETF, which possesses shares in approximately 32 companies. 

This offers investors a broader perspective of the cannabis industry’s direction and allows for a more balanced distribution of risk among stocks. It also allows investors to conduct thorough research and identify the stocks they are most likely to persistently invest in and endorse within their portfolios.

The cannabis industry is an accelerating market expected to witness more nationwide legalizations. With a well-structured investment strategy that acknowledges the volatility of this market, those intrigued by the industry can prosper with the right approach. 

Ensure you understand the sector of the market you aim to invest in, and which products, cultivators or businesses are most appealing to your investment portfolio. Consider using ETFs to spread your risk, or contemplate starting on a smaller scale to determine where your money is most effectively allocated in the market.

Diversification

Diversification is crucial in investing, and to achieve it, you can invest in shares from various companies. Buying ETFs or mutual funds is efficient for investors with limited capital to achieve broader diversification. The ETFMG Alternative Harvest ETF, the Horizon’s Life Sciences Index ETF, and the Cannabis ETF are three of the biggest cannabis ETFs.

While it’s understandable to be enthusiastic about investing in the cannabis sector, your portfolio must also span other sectors. It’s also typically advisable for an investor’s portfolio to allocate a portion to bonds, alongside stocks, in accordance with their risk tolerance and investment objectives. Although not a guarantee against losses, diversification can mitigate portfolio downside by distributing the risk.

Try and Avoid Penny Stocks

Regrettably, many cannabis stocks are marketed as penny stocks, exchanging for under per share beyond the primary market platforms. Despite their seemingly appealing low costs, they carry substantial financial risks that should warrant caution.

The allure of their low prices can be deceptive. Penny stocks come with a multitude of financial hazards. The potential for enormous returns is more frequently met with losses than profits. When a stock doesn’t have many shares trading hands regularly, investors often can’t purchase or sell at their chosen price. Increased trading volume engenders greater liquidity and smaller bid/ask spreads.

Penny stocks in the cannabis sector are generally sold via over-the-counter transactions. They lack asset protection for cannabis industry. This renders them highly speculative and also implies that there are fewer public disclosures and regulatory standards.

So far, cannabis businesses haven’t successfully transitioned from these minor markets to the more conventional ones. In 2016, for instance, Nasdaq rejected the request of cannabis tech company MassRoots to be incorporated into their larger, more regulated market. Nasdaq justified this decision because MassRoots was “facilitating the distribution of an illicit substance.”

Seek Out Cannabis Stocks Offering Top-tier Dividends

Dividends can be a beneficial source of additional income. They are essentially portions of a company’s profits given out to shareholders. Some companies within the cannabis sector provide dividends which can either be saved as earnings or reinvested into the company for purchasing more shares, potentially leading to larger dividends in the future.

However, be cautious about exceptionally large dividends, which can be reduced without warning. Additionally, if a company’s dividend yield appears unusually high, it could indicate it is in dire need of attracting investors.

Endnote

Many retail investors find the idea of investing in the cannabis sector appealing. Before diving into this or any investment, take a moment to ensure it aligns with your financial objectives and strategies. Alternatively, you could consult a certified investment advisor to ascertain if this investment suits you.

NCS
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