Investing in the Green Rush

Business.com / Finance / Last Modified: September 21, 2017
Photo credit: VallaV/Shutterstock

With the rise of the cannabis industry, small business owners and everyday retail investors are looking for the safest and easiest way to invest in the space. This breakdown shows the safest opportunities and options available today.

North American marijuana sales totaled $6.7 billion in 2016, and they are estimated to grow to over $20 billion by 2021. Everyday people are getting more familiar with the cannabis industry, whether because they are consumers and advocates or out of interest in profiting off the potential legalization of a budding multibillion-dollar industry. In this space, there are two kinds of opportunities for investors to get involved: private investments and public companies.

What is the difference between private placements and public listings?

A private placement simply refers to investing in a company that is raising money privately as opposed to issuing and selling shares publicly on an exchange. Investing in private placements has the potential for large payoffs, but it also comes with the inherent risk of not being able to sell your equity easily. There may be high barriers to entry with private placements as well, with minimum investments often in the hundreds of thousands of dollars.

For most people looking to invest in the cannabis industry, buying publicly traded stock will be the easiest and quickest route to go with the lowest barrier of entry. Even though marijuana is not federally legal in the U.S., there are several places to find data and information on marijuana stocks today. There is a handful of cannabis-related companies that you can invest in listed on U.S. exchanges such as 22nd Century Group Inc. on the NYSE, and another handful listed on international exchanges. Depending on your broker, your access to foreign markets may be limited. If you use an investing app like Robinhood, you can actually trade NYSE and Nasdaq-listed cannabis stocks, commission free.

What's the easiest way to invest in the industry overall?

If you are looking to invest in a handful of these publicly traded marijuana companies without having to figure out the best one for you, you can invest in a "basket" of stocks called an ETF.  An ETF is an exchange-traded fund and tracks an index. This allows investors to invest in one thing, as opposed to investing into all of the underlying assets one by one. In the cannabis space, investors can buy shares of the Horizons Medical Marijuana Life Sciences ETF (TSX:HMMJ), which tracks the North American Medical Marijuana Index. Not only does this save you from paying commissions on buying each one of the stocks in the basket separately, but more importantly, the ETFs rebalance and change how much of each stock they hold to reflect the industry, and hedge risk for investors.

Most assume that, because of the federal legislation regarding cannabis, there is no way to invest in the industry. This is wrong, as there are many ancillary businesses that are publicly traded.

Is it safe to invest in pot stocks as a U.S. citizen?

The short answer is yes. Recently, The Wall Street Journal put out an article discussing the possible risks of Canadian exchanges listing U.S. cannabis companies. This fear, though, refers to Canadian exchanges listing U.S. marijuana companies, and how doing so may interfere with U.S. law. It is not referring at all to U.S. investors being able to invest in Canadian securities, or into U.S.-listed cannabis companies. The risk involved with investing in publicly traded cannabis companies is no more than investing in any other publicly traded company.

As legislation continues to change in the U.S., more and more American cannabis companies will likely go public, creating more opportunities for investors than ever before. Just as in any young industry, due diligence and research is key. Investors should consult with their financial advisors or investment professionals to determine whether the risk profile of a given investment fits with their goals and circumstances.  

For most of you, purchasing stock will be the route you take.

 

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