4 Crucial Points On How To Invest In Weed Stocks

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Karen Poteat By Karen Poteat | Editor

Challenges To Overcome When Investing

Medical marijuana is permitted in 29 states, the District of Columbia, Puerto Rico, and Guam with 8 of these states and D.C. permitting the legal use of recreational marijuana. In fact, Canada is on track to legalize recreational marijuana next year. There are so many publicly traded marijuana penny stocks that present ideal investment opportunities for the investor. But there are many challenges that you need to overcome when investing in marijuana penny stocks. Here are important tips to consider on how to invest in weed stocks.

1Over The Counter Penny Stocks

Marijuana penny stocks usually trade over the counter compared to on a public stock exchange. In fact, these stocks are not held to the same standard when it comes to financial reporting. On the other hand, penny stocks have a low liquidity - you may have to sell the stocks at a lower price to attract a buyer at times.

Numerous marijuana penny stocks have different political risks. In fact, if there is an attorney general who is adamantly opposed to the legalization of marijuana in the United States, it presents a political danger for the marijuana stocks in the U.S. But Canadian marijuana stocks such as Canopy Growth (NASDAQOTH: TWMJF) don't come with similar political risks.

2Some Stocks Have A Higher Risk Than The Others

A successful investor knows who to manage a risk properly. You should keep in mind that some marijuana stocks come with a greater risk than the others - some of the riskiest are the penny stocks.

Penny stocks initially traded for pennies - less than $1. That is how they got their name. Today, a stock with a share price of up to $5 is categorized as penny stocks. But the share price isn't making these stocks any riskier.

3The Share Price Can Quickly Plummet

Some investors have invested marijuana stocks that have quickly gone up in price. But the stocks that go up quickly can come down the same way. In fact, the decline could be even quicker than their ascent. The previously referred to penny stocks could be the most susceptible to the up and down effect. When the investors become nervous, the share prices could be affected. In fact, they can plummet with very low liquidity levels - which makes it harder to find buyers.

The stocks that are valued the most could be negatively impacted during a downturn. That is why you need to be cautious of a higher value that is hard to justify. Such stocks are impossible to defend when things are not going their way. Hence, an investor should look for marijuana stocks with acceptable risk levels.

4Price Doesn't Equate To The Value Of The Stock

The fundamentals of investing apply for marijuana stocks as well. In fact, you should adhere to the fundamentals when investing in marijuana stocks. Buying stock means you are investing in a part of a business. The business should be a solid one with a good growth potential. Valuation is very important. But a stock's price will not accurately reflect the real value of a business at times.

For example, when you invest in Canopy Growth, you buy part of a business that markets medical marijuana in Canada. The company owned property, plant, and equipment worth of $61 million at the end of 2016. The cash equivalents were close to $93 million. The business generated a revenue of $25.2 million in the last 9 months. The total earnings are $4.5 million. Canopy is a solid business with exceptional growth potential when Canada legalize recreational marijuana use, simplifying how to invest in weed stocks.