How to Invest in Cannabis in 8 Easy Steps

Learning how to invest in cannabis is not for risk-averse investors. If you were investing in cannabis in 2017 and 2018, you know how far and how fast these stocks can rise and fall. 

Still, the potential for this industry remains tantalizing. 

Before you invest your hard-earned capital in this sector, you need to understand the different types of cannabis investments, the risks of investing in cannabis and the eight steps you can take to invest in cannabis. 

Key Takeaway

Investing in cannabis can be highly volatile yet rewarding. Different investments include cannabis stocks, exchange-traded funds (ETFs) and direct investments in cannabis companies. To mitigate risks, consider diversifying your portfolio. Research shows that the global legal marijuana market should reach $55 billion by 2027.

Basics of the Cannabis Industry

The size and scope of the cannabis industry can take your breath away — it's not just about farmers growing marijuana plants or your local dispensary. 

The cannabis industry ties in growers, dispensaries, pharmaceutical companies and companies that help provide the infrastructure. It's a complex industry of intertwined interests and made even more complicated because cannabis remains a banned substance by the federal government. 

That hasn't stopped individual states from taking up the question of cannabis regulation, but that creates another obstacle. There is no uniform status regarding the legal status of cannabis. 

The good news if you're interested in cannabis investing is that as of January 2023, only six states (North Carolina, South Carolina, Nebraska, Kansas, Idaho and Wyoming) have not legalized cannabis at any level. You may be equally surprised to find that 22 states have made cannabis fully legal, meaning you can use it for recreational and medicinal purposes. 

Now, the bad news. Investors looking to invest in weed face an uphill climb. Even in states where cannabis is no longer decriminalized, some restrictions tie into how much individuals can possess and grow. The remaining 23 states have varying legal standards that make cannabis regulation a crazy quilt for cannabis companies to navigate, as the chart below shows. 

Status of Cannabis Legalization by State

This chart provides a broad overview of the status of cannabis legalization in the USA today. There are nuances in many states that you can research by state. 

Fully Legal (Recreational and Medical Use	Legal for Medical Use Only	Legal for CBD Oil Only	Not Legal
Alaska	Arkansas	Georgia	Idaho
Arizona	Alabama	Indiana	Kansas
California	Florida	Iowa	Nebraska**
Colorado	Oklahoma	Kentucky	North Carolina***
Connecticut	Pennsylvania	Tennessee	South Carolina
Delaware	South Dakota	Texas	Wyoming
District of Columbia	Utah	Wisconsin
Hawaii*	West Virginia
Illinois
Louisiana*
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi*
Missouri
Montana
New Hampshire*
New Mexico
New Jersey
New York
Nevada
North Dakota*
Ohio*
Oregon
Rhode Island
Vermont
Virginia
Washington

*Although technically considered not fully legal, these states have passed laws that allow for the use of cannabis for medical and recreational purposes with heavy restrictions.

**Although officially illegal, Nebraska has passed laws decriminalizing small amounts of marijuana.

***North Carolina allows CBD oil for patients with treatment-resistant epilepsy and has passed laws decriminalizing small amounts of marijuana.

Overview of Cannabis Stocks

If you're considering investing in cannabis stocks, the chart above shows both the short-term risk and the long-term opportunity. Taking advantage of this opportunity starts by considering what kind of cannabis stocks you want to buy. 

But first, a word of caution. Cannabis investments are inherently risky. Many of these companies are small-cap companies (meaning they have a market cap of less than $2 billion). 

The risk is that small-cap stocks frequently have less liquidity than their large-cap counterparts. That means sending the prices moving in either direction doesn't take much. And when the stock price makes a sharp move, you can lose a lot of money if you're on the wrong side of the trade. 

The other risk comes from the financial situation of many cannabis companies. Even when the cannabis bubble blew up in 2018 and early 2019, many companies were not profitable. Many of these stocks are trading as penny stocks, meaning they trade for $5 or less. Be sure to learn about penny stocks before investing.

The takeaway is that investing in cannabis in 2023 is not like choosing from a list of FAANG stocks. And it's nothing like blue-chip investing. This sector is only for risk-tolerant investors. With that in mind, let's look at the type of cannabis investments.

Types of Cannabis Investments 

When it comes to cannabis investments, you have various options available. One of the most common ways to invest in cannabis is by directly buying stocks of marijuana companies. These can range from large-scale producers to biotech firms developing new cannabis-based medications.

Investing in cannabis stocks can offer significant potential for growth, especially as more states and countries move towards legalization. But remember that these stock prices can be highly volatile, given the industry's regulatory uncertainties. Conduct thorough research and stay informed about changing laws and market trends.

ETFs

Another avenue for cannabis investing is through exchange-traded funds (ETFs). These funds pool together investments from many people to purchase a diversified portfolio of cannabis-related assets. This can help spread out the risk of investing in any cannabis company.

Mutual Funds

If you're looking for a more hands-off approach to cannabis investing, you may also want to consider mutual funds focused on the industry. Financial professionals manage these funds, deciding whether or not to buy stock in cannabis on your behalf.

Stocks

If you're interested in investing in cannabis companies directly, one option is to look for stocks in publicly traded companies involved in ancillary businesses that support the industry. It could include companies that provide packaging solutions, hydroponic equipment or technology services to cannabis producers.

REITs

Another option for investing in the cannabis industry is through real estate investment trusts (REITs) that specialize in properties used by cannabis companies. 

These REITs purchase and manage properties such as cultivation facilities, dispensaries and processing centers, providing a way to profit from the industry's growth without directly owning cannabis stocks.

Private Equity Funds

There are also opportunities to invest in private equity funds focused on cannabis. These funds invest in private companies within the industry, offering the potential for high returns but also carrying significant risks due to the lack of liquidity and transparency compared to publicly traded stocks.

Other Opportunities

If you want to diversify your portfolio with cannabis investments, exploring options like hemp production companies and technology firms specializing in cannabis delivery systems can offer unique opportunities. The emerging market of CBD products is also worth considering, with companies focusing on research and development of new applications for cannabidiol.

Investing in international cannabis markets could provide further diversification as countries around the world continue to legalize and regulate cannabis. Monitor regulatory changes and political developments impacting the industry.

Types of Cannabis Investments

As mentioned earlier, several types of companies make up the cannabis industry. This list includes growers, retailers (dispensaries), pharmaceutical companies and companies that help provide the cannabis industry with infrastructure. Here's a brief overview of each type of cannabis investment.

Growers

Also known as cultivation, this is the sector where companies breed and produce a variety of cannabis strains. These companies employ individuals who have extensively worked in botany and plant science. This area covers areas like hydroponics, vertical farming and automation in the cannabis industry. 

Investing in growers was popular in 2017 and 2018 for a good reason. Investors believed that the companies with the largest supply would be the winners. However, as the industry failed to launch as expected, many companies became oversupplied. If and when the cannabis industry begins to fire on all cylinders, this supply-demand dynamic should change, and these pot stocks will move higher first. 

Retailers

Retailers are the customer-facing side of the marijuana business. In many cases, retailers must be familiar with the effects of different marijuana strains and the impact of varying consumption methods. In the case of medical marijuana, staff members may even have pharmacy training.

At this time, many of these businesses are not publicly traded. However, this is an area to watch, as consolidation will likely occur as many growers try to control the entire purchase cycle.  

Manufacturers

Manufacturers include companies in a field known as cannatech. These tech companies bring their expertise to the cannabis industry. Currently, they help producers with a digital presence by supplying innovative services and solutions that improve the product and customer experience while at the same time complying with federal and state regulations. 

This area also includes companies that help provide the infrastructure for cannabis companies, such as greenhouses. Investing in this sector may include investing in real estate investment trusts (REITs) that own cannabis-related properties.  

Drugmakers

The first thing many investors may consider in this section is CBD oil, one of the first genuinely mainstream products. More effort will go into discovering ways to make cannabis more accessible for medicinal purposes.

"How to invest in CBD oil stocks?" is a different question. Many of these companies are private companies and are likely to stay that way as long as cannabis continues to be a banned substance at the federal level.

Conduct Due Diligence

When it comes to investing in cannabis companies, due diligence is crucial. When examining a company, look into various factors such as its financial health, the management team's expertise, regulatory compliance and potential for growth in the industry.

Financial Health

Analyzing the financial statements of a cannabis company can help you understand its current financial position and future prospects. Look at key metrics such as revenue growth, profitability, cash flow and debt levels. Assess whether the company has a sustainable business model and a clear path to profitability.

Management Team

The management team plays a critical role in the success of a cannabis company. Evaluate the experience and leadership of the executives, their track record in the industry and their ability to navigate the complex regulatory landscape. Strong leadership can drive innovation, growth and operational efficiency within a cannabis company.

Regulatory Compliance

Given the legal uncertainties surrounding the cannabis industry, regulatory compliance is paramount. Ensure the company operates within local and federal laws, obtains the right licenses and permits and adheres to best practices for quality control and safety.

Growth Potential

Assessing the growth potential of a cannabis company involves evaluating market trends, competition, expansion opportunities and product innovation. Look for companies with a strong market position, unique offerings, and a clear strategy for growth in the evolving cannabis market.

8 Steps for Investing in Cannabis

So, how to invest in marijuana? First, let's consider the opportunity. According to Grand View Market Research, the value of the worldwide legal cannabis market may reach $91.5 billion by 2028. That would mean a compound annual growth rate (CAGR) of 26.3%. 

But like investing in any segment, investing in cannabis requires due diligence. Here are some steps to ensure you understand the opportunities in cannabis investment. 

Step 1: Know what you’re investing in. 

The medical marijuana market is further ahead of the recreational market in terms of being legal in all 50 states. Still, as the chart shows, all states have different regulations.  

Step 2: Decide on what type of cannabis company you want to invest in.

As we listed earlier, there are opportunities to invest in various stages of the cannabis process. 

Step 3: Perform fundamental analysis.

In addition to universal stock research, like looking at a company's management team, understanding its marketing plan and reviewing financial statements, you'll have to become familiar with some specific metrics for the cannabis industry: 

• All-in cost of sales per gram: A company's total per-gram cost of producing cannabis.
• Cash cost per gram: A company's total per-gram cost of producing cannabis, excluding the costs associated with amortization, packaging and inventory adjustments.

Step 4: Choose individual stocks or ETFs.

As you might expect, there are a variety of exchange-traded funds (ETFs) that invest in the cannabis industry. These can allow less risk-tolerant investors to gain exposure to this sector.  

Step 5: Invest your money.

For most investors, it's best to build a position slowly, which means picking one or two stocks or a single fund to start. You can use simple dollar-cost averaging to increase your position over time.

Step 6: Continually monitor industry events.

Like any other company you invest in, you have to set aside time to keep track of the stocks you own. MarketBeat makes this easy by sending real-time alerts for stocks in your portfolio or watchlist.  

Step 7: Understand the risks.

The cannabis sector has many risks (see below). Some are unique to this industry, and others are similar to what you expect from any penny stock.  

Step 8: Let MarketBeat help.

If you haven't done so already, subscribe to MarketBeat All Access to give you immediate free access to our premium reports, such investing in marijuana stocks for beginners. MarketBeat can also be your go-to research for guidance on how to invest in the tech sector. 

Risks of Investing in Cannabis

There are several risks for those who are investing in marijuana. First, without full legalization at the federal level, it's difficult, if not impossible, for businesses to operate across state borders. 

That means cannabis companies have to be licensed in several states (known as multistate operators). These companies are having some success, and they are multiplying. But you'll have to invest in more than one of these companies if you want full coverage of the cannabis market.

The second issue has to do with banking. Because marijuana is not legal in every state, many marijuana-related businesses (MRBs) have difficulty accessing traditional banking products. As of September 30, 2019, the Financial Crimes Enforcement Network (FinCEN) reported that 563 banks and 160 credit unions provided banking services to MRBs. 

This number is growing but still represents only a small fraction of the industry. The report doesn't give insight into what financial products these companies were able to access. 

And even for publicly traded stocks, concerns about supply and demand imbalances will continue to plague the industry. Another risk is that many of these stocks trade as over-the-counter (OTC) stocks, which means they may have different liquidity than other publicly traded stocks. These companies are also subject to different levels of accountability regarding providing shareholders with financial information. 

Finally, as investors saw in 2018, many of these companies still operate without much cash on their balance sheet, which can lead to the companies having to take actions that can dilute shareholder value. 

Future of Investing in Cannabis

The cannabis sector has tremendous potential. But it also has plenty of risk. If you're considering investing in this space, you have to be comfortable with investing in an opaque industry that will face high regulation in the future. 

Is Investing in Cannabis Stocks Right for You?  

The legalization of cannabis at the federal level still feels like a question of "when," not "if." With virtually every state legalizing cannabis for medicinal purposes, at the very least, pressure will likely come to bear on Congress at some point.

FAQs

Still curious about investing in cannabis? Let's look at a few more.

Which cannabis is best to invest in?

Do your research so you know the type of cannabis to invest in. Whether you're looking for a direct investment or one that is a bit of a less direct investment, you can consider many types of cannabis investments for your needs.

Can you make money in the cannabis industry?

Yes, you can make money in the cannabis industry. However, there's a risk of fraud and a certain level of uncertainty of investing in the cannabis industry, so do your research so you know exactly what to expect when you invest.

Which cannabis company is profitable?

Keep up with MarketBeat's information about cannabis stocks to learn which cannabis company is most profitable over others. MarketBeat offers details on cannabis companies and other leading brands that might make your decision about cannabis investments easy.