Investing in Cannabis: A Beginner’s Guide

Why Cannabis?

In recent years, investing in marijuana companies has gained popularity as more Americans have legal access to the drug. With recreational use legalized in over 20 states and medical use permitted in 38 states, there has been a significant increase in investment flowing into the industry.

The U.S. cannabis market was valued at $13.2 billion in 2022 and is projected to grow at a rate of about 14% per year until 2030. However, it's important to note that most cannabis companies are not based in the U.S., and they tend to have a relatively small market capitalization. Companies with a small market cap can offer higher risks and potential rewards. Before investing in marijuana stocks, it is crucial to have a good understanding of the industry.

Overview of the marijuana industry

The cannabis industry has relatively few publicly-traded companies compared to other sectors. Many pot stocks are headquartered in Canada since recreational marijuana was legalized there in 2017. Cannabis companies can be categorized as growers, industry players, or ancillary companies. Generally, the closer a company is to the plant and products sold at dispensaries, the riskier it is as an investment. Some major players in the industry, such as Canopy Growth, Green Thumb Industries, and Tilray, have been significantly more volatile than the S&P 500 in recent years.

Ways to invest in marijuana stocks

There are two primary ways to invest: Buy shares of a cannabis-related company or invest in a fund that tracks this industry.

Individual stocks

Investing in individual cannabis-related companies requires thorough research. It's essential to understand the dynamics of the industry, analyze a company's financials through quarterly earnings reports, and evaluate how its stock is valued using metrics like the price-to-earnings ratio. Diversifying investments across various cannabis-related companies can help reduce risk.

Here are top largest US cannabis-related companies:

Curaleaf Holdings (CURLF)
Innovative Industrial Properties (IIPR)
Green Thumb Industries (GTBIF)
Verano Holdings (VRNOF)
Trulieve (TCNNF)
Cresco Labs (CRLBF)

Here are top largest Canadian cannabis-related companies:

Tilray (TLRY)
Cronos Group (CRON)
TerrAscend Corp (TRSSF)
Canopy Growth (CGC)
Sundial Growers (SNDL)
Aurora Cannabis (ACB)

Marijuana ETFs

Given the risks involved in investing in individual stocks, some investors may find exchange-traded funds (ETFs) to be a preferable option. According to ETF.com, there are nine ETFs traded on the U.S. stock market that invest in the three categories of cannabis companies:

ETFMG Alternative Harvest ETF (MJ)
AdvisorShares Pure Cannabis ETF (YOLO)
Global X Cannabis ETF (POTX)
Amplify Seymour Cannabis ETF (CNBS)
The Cannabis ETF (THCX)
Cambria Cannabis ETF (TOKE)

How marijuana stocks fit in your portfolio

You might already be invested in marijuana stocks unknowingly if your portfolio includes index funds that track small-cap stocks. For instance, Tilray is part of 16 ETFs, as reported by ETF.com. If you prefer not to research individual stocks, an ETF or mutual fund could be a better choice. This allows you to diversify your portfolio, potentially avoiding volatility associated with single companies while gaining exposure to the broader cannabis industry.

Compared to larger and more established industries, the cannabis industry carries more risks. Many of these companies are small, foreign, and traded over-the-counter, which means they may not have the same financial requirements as those in the S&P 500.