3-Steps for hedging risk while investing in high-growth cannabis stocks.
In the past 60 days Millennial investors bought weed stocks at a faster rate than some fang stocks as reported by Markets Insider and if the cannabis industry continues to expand at its current rate, the American market will reach $20 billion by 2020 (via the Brightfield Group). the cannabis market has been blazing a fiery path alongside general monetary assets and commodities in this prolonged bull market.
Recently giant waves were sent through the market as Canada voted to full legalize the cash crop. Companies such as Delta9 have projected forecast increases of production by close to 250% over the next two years. plus the numerous Initial Public Offerings(IPOs) rolling out daily.
we here at Cannabindex have taken 3 basic steps to help those interested in investing in the booming cannabis industry!
Understanding the different sectors of the market
Studying & researching Cannabis stocks.
Confidently Hedging risk when Investing in cannabis stocks.
Step 1: Understanding the different sectors of the market
When it comes to the broad view of the cannabis market is broken down into two main sectors recreational & Medical, with rec scheduled to bring in near $11.6 million dollars and medical marijuana grossing around $3.2 billion dollars in sales last year.
Medical cannabis is legally accessible and sold in 30 U.S. states and in several countries around the world. Canada was the latest to join the legalization trend after Uruguay did so in 2013.
Due to its countless uses and applications cannabidiol/cannabinoids (CBD) is one of the main chemicals within cannabis leading the way for medical marijuana breakthroughs and cures!
Together both the medical ad recreational users have added to the overall increase in demanded products such as dry flower, vapes, concentrates, edibles, and oils!
continuing to dig deeper and segment the industry even more we find the cannabis market is broadly broken up into Three main categories,
(Hemp growers | Producers) usually cultivate, harvest, and distribute the crop in large scales to customers and other companies. Next are (Pharmaceuticals | BioTech) Companies that operate within this segment usually focus on developing and altering the CBD proprieties of the plant. Lastly is pretty mush everyone else. Companies that offer any ancillary product or service fall under this category of (Adjuvant | Ancillary) Companies that aid in lighting grids, hydroponic watering systems, finical book keeping, marketing, packaging, Management, etc.
Step 2 : Studying & researching Cannabis stocks
When looking to take the step into investing in Marijuana stocks, you should be able to do so with confidence! Confidence that you've put together a promising strategy. Confidence that you've identified trends in the market leading to the increase, decrease, or consolidation of the stocks price.
Begin Looking into the type of business and its activities/operations before jumping in, what are its core and unique factors affecting its value and company. In addition to the companies basic functions/actions digging deeper you should look into a company’s strategy for growing/expanding, its position relative to the market, and its competition, and its overall finances (looking for profitability, cash, short/long-term investments, amount of warrants and convertible securities issued by the company (affecting the underlying price of the stock) ETC. Hopefully after analyzing each factor You'll be able to assure and justify your trades and actions within the market.
Step 3: Confidently Hedging risk when Investing in cannabis stocks.
It goes without saying that regardless of the asset risk will be involved to some degree, but unlike those other assets when investing in Cannabis and CBD stocks. Attempting to identified and develop a strategy that accounts for your risk tolerance, current financial status, and investment vehicle (stock,option,etc). In addition you'll need to account for factors such as Legal/political regulations, rapid increases or decreases in Supply/demand stocks affecting the overall marijuana market, and asymmetric information usually as a result of a company trading on the OTC exchange.
Legal | Political:
In general investing in the cannabis sector provides abnormal risk because of its federally illegal status in the states, making financial operations and banking a huge hoop to jump through, but as of recently the government with little evidence to back, seems to be loosening up its stance as president Trump could possibly allow states to regulate the crop. Which would not only be beneficial for companies operating in the sector, but for individuals and others wanting to get in!
Supply | Demand:
Many companies operating within the industry have seen exponential growth in production and increased initial demand, as a result of Canada's cannabis legalization. With large influxes of cash, and “gold rush” like employment opportunities the large shifts of growers/farmers growing and harvesting will have a definite effect on the cannabis market. High initial customer demand could be dangerous, potentially saturating the market, but the increased global demand with a projected market cap of $62,964 MM (USD) by 2024, growing at a CAGR of around 21% between 2018 and 2024. (according to: Zion Market Research) and innovative technologies from Blockchain and banking alternatives, to streamline growing operations, Data collection/analysis and AI may help to combat initial demand oversupply.
Unlike stocks traded on major exchanges like the NYSE & Nasdaq, filled with big companies,and staff devoted to meeting regulations and financial requirements,etc. Cannabis stocks mostly trade on the (OTC) Over-the-counter exchange, OTC stocks are less regulated than bigger exchanges, and aren't held to the same standards meaning they don't keep up regularly reporting on financial statements, or meet market capitalization requirements to get on those bigger exchanges. This creates less than ideal investing conditions and leaves investors guessing about market capitalization, and general business activities. With many cannabis stocks filing for public offerings on the OTC exchange. Investors and individuals looking to get involved should research companies and Only invest and trade otc cannabis stocks if you can tolerate high levels of risk and volatility should Get involved. In addition investors should start with small position, and create and stick to an investing plan for their portfolio always looking for ways to avoid or minimize risk while gaining the most value possible.
This article was inspired and derived from The Motley fool’s : How to Invest in Marijuana Stocks Seven straightforward steps to help you invest in high-growth-but- high-risk/marijuana stocks. written by:Keith Speights