Lucrative Cannabis Prospects
The cannabis industry continues to entice potential investors looking forward to capitalizing on high revenues from untapped markets and commodities that may turn out more popular within the coming years. This controversial industry flourished fast in regions like North America (Canada) and the United States.
The Canadian government legalized medical marijuana encouraging companies to enter the market. Stakeholders expect cannabis legislation to change in this country as officials are planning to allow recreational use. Investors have also expanded in the United States where medical marijuana is legal in 30 states while nine other states legalized cannabis for recreational purpose.
Investing in cannabis comes with risks particularly due to the industry’s volatility as legal issues and business models remain erratic. Anyone who wants to take the risk must build a robust cannabis investment portfolio. Smart investors must avoid speculation and hasty decisions. Otherwise, they can lose all their hard-earned investments.
Building your Portfolio
Legal marijuana emerged as the fastest-growing business in the North American region. Nasdaq.com disclosed that cannabis sales in the USA grew 30% in 2016 and reached US$6.7 billion. The decision of Canada’s federal government to legalize recreational cannabis can lead to a US$23 billion industry.
In preparing your financial assets, try to avoid small publicly-traded firms with a market capitalization of below US$50 million which refers to Nano cap or Micro cap of between US$50 and US$300 million. Instead, opt for Mega ceiling which refers to corporations holding market financing of more than US$300 billion.
You can find some of the more profitable cannabis opportunities in countries like Canada, Australia, and Israel. Canada mulls moves to sanction recreational cannabis. Israel decriminalized medical marijuana. It plans to follow Canada’s example regarding recreational weed. In the middle part of 2016, Australia supported the legalization of therapeutic cannabis.
Diversification can help the cannabis investment portfolio to endure. Keep this in mind. Publicly-listed cannabis enterprises deal with the plant’s whole life cycle from planting to selling and consumption. Some companies simply provide supplementary services in the form of essential commodities and services that produce the plants for sale to general consumers.
Investors can expand by expanding investments around stocks with a broad range of market capitalization statistics. The risks are higher in small market caps, but these companies can thrive and become large cap ceilings by playing their cards right. To diversify, investors can identify businesses with multiple market thresholds and distribute the stakes across several companies.
However, diversification may not always turn out as a reliable risk-aversion approach. Consider this scenario: In case the cannabis industry experiences a surge that resonates across the market, investors can lose on possible gains if only one-half of their portfolios encompass cannabis stocks. Then, you should find out if diversification is the proper method.
Concentrate on the long-term since the cannabis industry will encounter excessive unpredictability at its experimental stage. In 2014, the sector improved by over 200% only to plunge into a bear market. Stocks dropped more than 50% during this period. Nonetheless, prospects run high with many investors getting more enthusiastic about the industry outlook. In fact, common cannabis stocks have valuations that seem unreasonable compared to Standards & Poor’s 500 market values.
Cannabis stock spreads normally turn out wider compared to their blue-chip counterparts with the market ceiling in billions of dollars. Reasons include smaller market capitalization and significantly lower trading volumes. However, in trading cannabis stocks, limit orders or buying and selling at specific prices help avoid slides on entry prices. This trading strategy minimizes investment downsides.
Know the Risks
The higher conceivable returns expose investors to greater risks that could impact expected returns. Markets cannot guarantee success despite the progress of enterprises in the medical or recreational marijuana sector. Majority of these companies hedge their profits on future distribution as well as product sales notwithstanding the fact that guidelines concerning marketing and sales remain in the process of being strengthened.
Some pioneers in medical cannabis ventures did not prosper because of their failure to feed investors enough disclosure regarding barriers to entry in the industry. These factors hinder the smooth passage of startups in any kind of business. Such obstacles consist of licenses and permits to operate along with documentation required to generate profitable commerce. In Canada, securities’ regulators work double time to tackle disclosure requirements although investment risks persist without assurance of income or earnings.
Bureaucracy and Regulation
Most governments, as well as regulatory agencies in many countries, are still exploring the aspect of the legislation. Watchdogs have yet to determine the markets and basis for selling cannabis merchandise. There are restraints when it comes to retail outlets authorized to sell marijuana. Vague policies on advertising and branding affect consumers capability to find and buy said items. These limitations influence companies’ capacity in marketing and distribution which ultimately affect the generation of profit and reduce the value of your investments.
Like all businesses, cannabis enterprises must conform to the laws and policies of jurisdictions where they conduct operations. Laws vary from one country to another. Companies must abide by the law or risk legal actions as well as the closure of their business.
In the United States, it would be wise to avoid putting your money in states where marijuana remains prohibited. Likewise, federal law makes it likely for enterprises to face prosecution and seizure of assets. Laws and parameters in Canada continue to change which serve as guidance on how cannabis firms should operate.
Prices and Taxation
Bureaucracies require taxes and influence pricing. Products meant for recreational purposes call for pricing lower than the black-market value to entice consumers. Companies can hardly make any profit if governments set exorbitant prices or dealers in the illegal trade weaken prices of commodities that legitimate retailers or suppliers sell.
Bloated Share Prices
Investment opportunities in cannabis have yielded high levels of interest among investors eager to cash in on this new business trend with hopes of quick and rewarding returns. Even then, such investments remain highly speculative with costs depending on the probability of success instead of existing performance.
Some companies realize a sudden growth in stock prices even before a feasible business is in place. Investors always face the threat of paying for an overestimated price for an investment that may not increase in value at all if they acquire shares in these companies.
Dilution means a reduction in ownership percentage of a business entity or stocks shares resulting from the release of new equity shares. Companies must scale up operations to meet the increasing demands as cannabis goods become more popular. Scaling refers to the procurement of additional equipment, construction of bigger structures, and hiring of more workers. The process entails substantial funding. Companies with inadequate resources can raise finances by issuing extras shares.
These shares come at the expense of current stockholders whose ownership percentage declines correspondingly to a number of shares introduced. As a result, your investments will go down in terms of value. The final concern of investors is prohibitive operating costs. Expenditures in the operation of cannabis ventures call for exclusive, extensive facilities, and massive amounts of power as well as capital for sustained operations.
Investors must understand the business plan of the company concerned and includes strategies for earning, associated risks, business costs, and how much time it will take before the enterprise starts to earn money.
The fast-paced development of the cannabis industry produced opportunities for startup entrepreneurs to build products, services, and technologies further than growing and distributing marijuana. Companies operating within this sector focus on the following:
- Agricultural technology focuses on development and innovation of equipment needed for cannabis farming which consists of greenhouse technology, automated fertilizer systems, and sophisticated lighting fixtures.
- Biotechnology deals with pharmaceutical uses of marijuana.
- Subsidiary or secondary commodities that supplement the industry such as laboratories for performing experiments.
- Consulting relates to rules and regulations in various jurisdictions and provides services for licensing, certification, zoning, and advice on operational procedures.
- Agriculture and Retail which refers to tilling and selling different varieties of marijuana.
- Cannabis extracts include cannabidiol, edibles, beverages, and topicals.
- Industrial hemp aims at manufacturing consumer goods including foods, fuels, clothing, paper, and construction materials.
Other possible areas of specialization include holding firms, consumption devices, and organic farms.
Obtain the Appropriate Information
Before preparing your cannabis investment portfolio, take the necessary measures in researching on the opportunity and considering how your investment will eventually flourish.
- Scrutinize the disclosure papers. Companies must provide the complete set of documents including a prospectus or brochure, pre-listing statement, and offering memorandum. This legal document stipulates objectives, risks, and provisions of investments with private placements. It includes specifics of operations in states and countries together with compliance with laws for every territory.
- Review the company’s annual reports, press releases, management analysis, and relevant materials that indicate whether the business is earning or losing money.
- Seek professional help possibly from an investment counselor who can assist you in choosing the right investments.
- Evaluate your prospects reasonably. Avoid the hype about companies and look instead at the numbers or genuine data that demonstrates potential growth. Determine how stocks can obtain a significant share of the existing market. Think big. Invest with a long-term point of view and competitive advantage giving you more chances of succeeding.
Too Much or Too Little Diversification
First-time investors normally invest in one or just two companies which offers greater risks. With a single or few positions, chances of higher loss become higher you fail to speculate correctly. In other words, owning one share translates to a 50% shortfall which is not rare in this industry. Your stocks must increase to break even.
Overall, cannabis stocks fail to amass positive cash flow with most of these relying on convertible notes or short-term debt that transforms to equity in subsidizing operations. This type of funding produces continuing downward pressure on stocks since the liability turns out frequently exchangeable at a discount on the stock’s market price. Debtors sell their shares purchased at a markdown (money-off) in the market. Such a scenario leads to a negative outcome that can cause the company to collapse.
Inexperienced investors often build portfolios using numerous stocks. Less diversification brings fewer risks as against no diversification at all. In short, you can have too much of variation. Adding 20 or more corporations with probable negative returns will unlikely enhance your portfolio.
On the contrary, it will result in dilution. At this time, you cannot find many stocks that deserve investment. Henceforth, creating an investment portfolio even with 50 shares or more does not guarantee enough returns. The likelihood of scams makes matter worse. You may end up empty-handed sooner or later.
Why Invest and How to go about it?
The capacity to invest in publicly-traded corporations (pure play) focusing on a single commodity or industry and draws active investors who concentrate on the same segment remains limited. Authentic options come from big pure-play companies based in Canada which include the Aurora Cannabis, Canopy Group, Cronos, and Tilray. You may also consider ETFMG Alternative Harvest, a cannabis-based exchange-traded fund.
Investors will find out that some stocks surged last month due to the legalization of recreational marijuana by Canada’s federal government as of October 2018. However, not all provinces follow the same process. Manitoba and Quebec still prohibit cultivation at home. Regardless of timelines and varying rules, more investors prefer to purchase shares at a period possibly considered the industry’s lowest point. To put it simply, invest your money before cannabis undergoes that desired boom.
What’s your Bottom Line?
The crux of this issue is simple. Investors should be extra cautious when they decide to invest in stocks that do not trade in major exchanges. Trading over the counter in cannabis attracts many speculators. Unsuspecting investors become targets of price manipulators. Avoid dealing with companies on Pink Sheets which are too small for listing by the Securities and Exchange Commission on national exchanges or refuse to reveal their financial statements to the public.
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