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In only a few short years, cannabis has emerged as one of the next big market disruptors. Today, as billions of dollars pour into the sector, investors are keen to take part in the anticipated marijuana boom. But before you add marijuana stocks to your portfolio, consider how the legality issues that surround this product may impact profits.
Cannabis refers to plants Cannabis sativa, Cannabis indica and Cannabis ruderalis. This plant can be processed for a variety of purposes, from topical oils and food products to building materials — but it’s popularly grown and consumed for its psychoactive properties.
Cannabis legalization is a divisive subject and the laws that govern its consumption vary by state. Some states, like Washington, Vermont and California, have legalized both recreational and medical marijuana consumption. Others, like Utah, Arizona and New York, only permit marijuana consumption for medical purposes. In many other states and under federal law, cannabis consumption is not permitted in any capacity.
Some in Congress are pushing to lift the federal prohibition during the current term, which would be a watershed moment for the industry.
Cannabis stocks are shares of any company that grows, harvests, sells, manufactures or distributes cannabis, including hemp.
Unlike marijuana, hemp is not a narcotic. While hemp and marijuana both come from the cannabis plant, hemp has a lower component of the psychoactive THC — typically less than 0.3% — which means it has no psychoactive effects.
Typically, hemp is used in food products, building materials and textiles. Marijuana, on the other hand, is primarily used for medicinal and recreational purposes.
Cannabis stocks can be purchased directly from US exchanges. If you’re interested in international cannabis stocks, you’ll need a brokerage account that offers access to global or over-the-counter stocks. Select a company to learn more about what they do and how their stock performs, including market capitalization, the price-to-earnings (P/E) ratio, price/earnings-to-growth (PEG) ratio and dividend yield. While this list includes a selection of the most well-known and popular stocks, it doesn't include every stock available.
ETFs contain a bundle of stocks, usually hundreds, and these often track an index of stocks. There are a handful of cannabis ETFs listed in the US.
Despite its lack of legality in numerous states, cannabis is a popular product. And state-level government is becoming more open to its use.
Medical marijuana was first legalized in California in 1996. And in 2012, Colorado and Washington became the first states to legalize the plant’s recreational use. Today, recreational marijuana is legal in 11 states and medical marijuana is permitted in 33 states.
As more states become accepting of medical and recreational marijuana use, the cannabis market grows. And as the cannabis market grows, so do sales, profits and company valuations.
The shift in attitude towards cannabis isn’t limited to the US. In 2018, Canada legalized recreational marijuana use across the country. And other international governments are reassessing their cannabis laws too, potentially paving the way for an explosion of new businesses.
Statista reports that in 2018, the global cannabis sector was worth $13.8 billion. By 2025, it predicts the sector will swell to $43 billion. The cannabis market is one poised for growth — and for investors, growth means profit.
Positive growth projections aside, cannabis may not be a practical addition to your portfolio. And that’s because this sector is riddled with risks — many of which stem from the legality issues that surround the product.
As laws that surround the legalization of recreational marijuana continue to shift, investors must be wary about how high tax rates could impact the market. Tax rates have the potential to cripple cannabis providers in states that allow recreational marijuana because of how high consumers are taxed.
For example, in California consumers are taxed close to 45% for recreational cannabis. With taxes that high, it’s little wonder that Golden State consumers turn to the black market to purchase their product, leaving cannabis providers high and dry.
Financing for cannabis companies is also a concern, as cannabis companies are seen as high-risk merchants in the eyes of many financial institutions. As a result, many of these banks aren’t willing to provide essential banking services and funding must be found elsewhere. One way cannabis companies can raise funds is to issue common stock, but this dilutes the holdings of existing investors.
Overall, the cannabis market seems to be gaining traction. And for investors that can tolerate risk, this is an exciting prospect. But ultimately, the variables that factor into the profitability of this market are constantly in flux — and this sort of instability can lead to price volatility.
The global cannabis market as a whole is expected to grow and it may gain significant traction in the U.S., where its legality remains contended at the federal level. The market value of the cannabis industry in the U.S. is projected to climb to $30 billion annually by 2025, according to New Frontier Data.
More U.S. states have aimed at relaxing laws around its usage. New Jersey, Arizona, Montana and South Dakota in December 2020 approved ballot measures to legalize recreational use of marijuana. However, marijuana stocks fell following this news as federal elections remained in question. The MORE Act which would decriminalize marijuana at the federal level passed the House in December 2020. But its future is foggy. So it’s important to carefully analyze cannabis stocks to find where the potential long-term winners may be.
Before you can buy cannabis stocks or ETFs, you’ll need to open a brokerage account. Explore your platform options below.
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While smoking weed is perhaps the most well-known use of cannabis, there are many types of businesses that are positioned to benefit from the growing sector. As more cannabis products are given the green light, we’ll see the market continue to expand. The legalization of many of these products is new and in some cases, still underway:
The legal cannabis sector is positioned to grow in the coming years and there are a number of ways to invest. But keep in mind that past performance is not a guarantee of profit and all investments come with inherent risks.
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