Is Investing In Cannabis Stocks Risky?

Most investments come with a set of risks and potential rewards. The same is true for cannabis stocks, which open up the door for a bright and green future but are also burdened with some challenges shaping this industry and the potential profits investors can reap. 

Let’s get a closer look at all the potential risks and rewards one needs to consider when investing in the cannabis industry.

Key Highlights

• The legal status of cannabis in the U.S. and around the world impacts the way the industry functions and is funded.
• Small cannabis companies still build their profitability, and their stock prices are often volatile.
• Cannabis ventures cannot be funded by institutional investments, and for this reason, they rely on private investors, offering attractive stock prices and a perspective of significant growth. 
• The weed industry is still in its early stages of development, and it is predicted to grow to $102.9 billion by 2028.

Cannabis Investment Risks

It would be a significant oversight not to consider all the potential drawbacks of cannabis investments, taking into account the sometimes complicated matter of their legality and the fact that this is a relatively new niche.

In the current climate, there are still questions unanswered regarding the use of cannabis, both for recreation and, maybe more interestingly, for medical and research-related purposes.

What challenges are awaiting those interested in making investments in this sector?

Legal Considerations   

The first and most obvious concern relates to the still uncertain position of cannabis and cannabis products in various markets. Granted, we seem to be moving in the right direction, with 24 states in the U.S. that have legalized the recreational use of cannabis and 38 states permitting the medical use of it. But the fact remains that, in the States, weed sale is illegal at the federal level.

Globally, more than 40 countries have introduced cannabis-permitting laws, and that opens many doors for investors. However, legal roadblocks can significantly impact the growth of the whole industry, as well as particular businesses. Additionally, factors such as difficulties in receiving proper funding from bank institutions or complications that hinder the research work being done in the sector, play key roles. 

Unproven Business Models and Profitability

As we mentioned previously, cannabis is still a relatively young industry branch. Many new companies enter the market, but these entities haven’t got a chance to build their profitability yet. They operate in a complex legal environment with not many success stories to model themselves after. 

This creates conditions in which smaller weed companies tend to issue new shares in order to keep themselves afloat, devaluing the already existing shares. Investors face the risk of these companies going out of business and enduring considerable fluctuations in their stock prices. 

Many cannabis businesses in the States have to trade their stocks through over-the-counter (OTC) markets, which means there’s a risk of fraud and uncertainty for investors who don’t have access to all the essential information about these entities.

That’s why learning how to invest in cannabis companies is imperative. It requires conducting proper research into businesses you want to invest in, their financial standing, and strategies.

Limited Research

There are many potential applications for cannabis, especially in the medical sector. That’s undoubtedly exciting, but we are still years, if not decades, away from the plant being widely used to treat patients around the globe. We are at the initial stages of research focused on weed and all its properties, and there’s still a long way to go.

As of now, there are only a few cannabis medications approved by the FDA to treat various ailments, including CBD-based Epidiolex^® to treat seizures and THC-based Marinol^® prescribed for the treatment of nausea in patients undergoing cancer chemotherapy. 

Research on cannabis faces a set of barriers, such as its  legal status, difficulties in acquiring cannabis and cannabinoids for research purposes, and challenges in obtaining funding and resources to support the studies.

Investing in Cannabis – Opportunities and Rewards

As presented above, there are certainly some risks involved in investing in weed stocks. But what about rewards? Why may this market be worth exploring? 

Booming and Diverse Market

For one, it’s undeniable that the interest in cannabis and cannabis investments only grows. Not only that, but the market itself is diverse, with many avenues that might become profitable in years to come. 

In 2023, the revenue of the cannabis market is estimated to amount to more than $50 billion globally (Statista Market Insights). By 2028, this value is expected to grow to more than $100 billion. This shows considerable potential for growth in this branch.

Investors have a chance to enter exciting, promising sectors such as medical and therapeutic marihuana and various secondary industries producing food, medications, and cosmetics based on cannabis. 

New Industry Which Benefits Early Investors

If you’re considering investing in the cannabis market, it might be more profitable to do it sooner instead of sometime down the line. Being a young and dynamic industry, it has the potential to reward early investors to a greater extent. 

As of now, the entry point is kept at a relatively low level, which creates opportunities for those who want to diversify their portfolio benefiting from these advantageous market conditions.

Affordable Stocks 

The illegality of cannabis on a federal level in the States has its negative consequences, but it also creates an environment in which cannabis stocks are valued lower than they are actually worth. And this can work as an incentive to invest. 

Due to laws present in the country, cannabis companies are not allowed to be backed up by institutional investments, such as endowments, mutual funds, or pensions – and these, in standard conditions, own even 50% of consumer-staple companies (but only around 5% of cannabis businesses).

In light of this, weed ventures seek private investors' financing, offering attractive stock prices and a perspective of significant growth. Considering the ascending trend in revenue increase and wide and exciting potential uses of cannabis in the future (both as a product for consumption and in medicine), investing in these stocks now, before the legal status of cannabis changes, can be a profitable decision.
    

Is It Worth Investing in Cannabis Stocks?

To sum up, the cannabis market is a growing and fertile one, but there are also some risks worth considering when investing in weed stocks. For example, the illegality of cannabis in many countries in the world, including the U.S., impacts the way weed companies develop and how they obtain financing. 

But it’s also important to notice the increasing interest of the public and researchers in cannabis, its properties, and how they can be utilized in the future. Due to lower stock prices, investing in weed companies might be a valuable strategy to produce great profits in upcoming years.

Interested in learning more? Find interesting investment opportunities in cannabis startups via OurCrowd.

As with every startup company in our portfolio, we have carefully selected and reviewed all our cannabis investment opportunities. Using third-party reports and our own internal research, we verify the technology, management and market opportunity, so that you can make informed investment decisions.

Create your accredited investor account, research available companies, and find the best projects for your investment portfolio!

FAQs

How risky are cannabis stocks?

Cannabis stocks are volatile and are being issued by companies operating in complex legal environments, and this can increase risks associated with investing in these products. However, the weed market is changing and is predicted to grow in revenue, which means it might be profitable to invest in weed stocks now.

Is CBD stock a good investment?

The CBD industry has recorded steady growth in recent years and is predicted to keep growing in the future. This can be an indicator that CBD stocks are worth including in your investment strategy. Like with any other investment product, it’s necessary to perform a careful analysis of individual stocks and their predicted performance before investing. 

How big is the European cannabis market?

The revenue from the European cannabis market is predicted to reach $8.47 billion in 2023, with annual growth of 15.47%. It is estimated that the market revenue for Europe will reach $17.39 billion by 2028.

Sources:

1. Statista Market Insights 

2. Global Brands Magazine, Should you invest in CBD Stocks?

3. Boston Magazine, High Returns: A Bostonian’s Guide to Investing in Cannabis 

4. Business Insider, Beginner's guide to investing in marijuana stocks and the booming cannabis industry