The Rise of POT Related Stocks and the Risks and Rewards of Playing/Investing in this Market
States are revising their stances on marijuana use, both medically and recreationally. Twenty states have de-criminalized medical marijuana consumption, and with Colorado’s recent decision to allow recreational use, the trend appears to be towards a less criminal, more regulated pot environment.
As an investor looking for the next big thing, you may be wondering how pot related stocks will affect your portfolio. But as with any industry on the rise, investment risks and rewards move with equal momentum. Read on to get a better idea of what risks you face and what rewards may be in store.
The primary risk for any investor looking to cash in on pot stocks is legality. While a number of states may have de-criminalized pot consumption, the federal government still classifies marijuana as a Schedule 1 drug. Until the US congress passes legislation de-criminalizing marijuana, those who supply and those who consume should understand the repercussions of violating federal drug laws.
Even if your investment nets you millions of dollars, you may have a tough time spending any of it if you are convicted of a drug felony.
Additionally, the vast majority of POT related stocks available to investors are traded over-the-counter (aka penny stocks). Penny stocks are not subject to the same oversight as stocks traded on the NYSE or Nasdaq, and there is very little information about the companies with shares that trade over-the-counter.
Some penny stocks are mere shell companies with no ongoing business activities, and some are legitimate corporations that care about their profits and their shareholders. Caveat emptor!
With legal uncertainty and a nascent marketplace, institutional investors are not yet ready to dip their toes into the pot-related stock market. This leaves the vast majority of shares available to regular investors trading for their own accounts. Microsoft was once a penny stock, and Apple was near bankrupt in the late 1990s. If the federal government decides to de-criminalize marijuana consumption, those who invest in pot-related stocks earliest will likely reap the greatest rewards.
Have or Eat Cake?
Until federal laws change, investors in pot related stocks will face what is known as volatility. Whereas Google shares may see stock prices move up or down by 1 – 2% each day, over-the-counter pot related stocks can experience huge swings in value each day. If you own a pot related stock, a 35% increase in share price in one day could net you a handsome return; a 35% decrease, however, could break your bank. Know in advance if you can stomach the volatility of penny stocks.
Regardless of your individual investing style, you should always ensure that you diversify your portfolio. In other words, don’t put all of your eggs into one basket. Either make pot related companies one of many different industries you invest in, or play both the upside and downsides of pot related stocks.
I never thought I would be writing about pot – but with all the buzz surrounding this exploding industry, only made sense.