Cannabis Stocks: Important Things You Need To Know!

Cannabis is the next big multi billion dollar industry and stocks are generally only going one way. So, here are the important things you need to know about investing.

  1. Deal With The Largest Companies In The Industry

The cannabis market is prevalent with micro and nano companies. Most of these companies have a market capitalization between $250-50 million respectively. Even though these companies have a great growth potential, they are prone to extreme volatility at times. They experience unexpected fluctuations in sales and growth most of the time. Hence, big companies with billions of dollars can easily push around the smaller companies. That is why you need to focus on the biggest companies in the industry when investing in cannabis stocks.

  1. Going International

The best dealings in cannabis happen outside the United States. In fact, Canada will legalize recreational cannabis by next summer. Australia voted to legalize medical cannabis in 2016, and Israel has already legalized using cannabis for medical purposes and is planning to legalize recreational cannabis very soon. Local companies that are listed on the stock exchanges in these countries are coming forward to cash in on the opportunities presented to them.

  1. Diversifying

It is not easy to separate the winners from the losers in the cannabis industry. While some of them become global leaders in the industry, others may file for bankruptcy after some time of operation. That is why you need to diversify your investment portfolio. Investing only in marijuana stocks is not recommended. Your portfolio will crash if the marijuana stocks go bust.

  1. Core And Peripheral Holdings

You should weigh your holdings differently in a diversified portfolio. The larger cannabis stocks should have a higher allocation while the more speculative ones should have a smaller allocation.

  1. Focus On The Future

The cannabis market is prone to extreme volatility. For instance, the whole sector rallied more than 200% in 2014. But the market crumbled into a bear market during the next 18 months. In fact, some of the stocks decreased more than 50% during this period. Don’t focus on this volatility and distract yourself from the bigger picture. In fact, the actual opportunities will come in the future.

  1. Don’t Fear Valuation

The expectations for marijuana stocks are high right now. In fact, many investors are really excited about the opportunity in front of them. That is displayed in these company’s valuations. Some of the best cannabis stocks come with valuations that are not that impressive compared to the S&P 500. Some experts may put down these valuations as being unsustainable. Even though there is a little bit of truth in it, you shouldn’t let that stop you from seeing the big picture.

  1. Using Limit Orders

Buying a cannabis stock is different to investing in a blue-chip like Alphabet. In fact, the spreads in cannabis stocks are much wider compared to blue-chips. That’s due to their lower daily trading volumes and smaller market caps. That is why you need to use limit orders when buying or selling cannabis stocks. It helps avoid price slippage on your entry prices.

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