The marijuana industry is really taking off, and, just like any other booming industry, there are a number of publicly traded marijuana stocks available for savvy investors to snap up.
Weed stocks have the potential to be lucrative investments, but, buyer beware!
Though the industry is picking up steam, investors must be careful with respect to how they select their stocks to avoid watching their investments go up in smoke!
As in any other industry, finding companies that meet the basic criteria of a wise investment is not always an easy task. This is especially true for an industry like legal cannabis that is still very young. Look for legitimate companies with established, long-term business plans and proven management teams. If you do not heed this advice, you risk investing in companies that are highly overvalued–or worse, worthless.
The current state of marijuana in the United States complicates any investor’s exploration of pot stocks.
Although medical marijuana has been made legal in a number of states, MMJ stocks are not always an easy topic to understand. Because of the disparity of marijuana’s legal status between states and even between states and the federal government, a great amount of confusion exists with respect to weed stocks.
A lot of companies have deemed it more difficult to trade on the Nasdaq or the American Exchange. As a result, these companies have sought out alternative means of accessing capital. For example, some companies have explored reverse mergers and other mechanisms. Some then end up as publicly traded on the over-the-counter exchanges.
“Over-the-counter” MMJ stock exchanges present challenges.
OTC weed stock exchanges might not be treated as seriously as the bigger exchanges. Additionally, these exchanges also allow for a greater degree of latitude with respect to the quality of the company willing to trade on them.
Structural shifts in the financial markets that have taken place over the last 20 years have had devastating effects on capital formation and innovation in the United States. Before these shifts, it was not uncommon for companies to go public, raising $5 million to $10 million in a small IPO.
However, times, and economies, changed. Now, due to the implementation of the Sarbanes-Oxley Act which affects both small and large companies, the ability for companies to become publicly traded through the traditional mechanism is much more limited than in the past. Arguably, the Sarbanes-Oxley Act placed an unfair burden on a small company and an easier burden on a large company, disrupting how smaller companies might do business.
Changes in the ways in which banks operate have affected MMJ stocks.
A national economic ecosystem no longer exists, disrupted by the number of business and regulatory issues have converged to create a market where the investment banks that used to exist on a regional basis no longer do.
Such regional banks may still exist in name, but, they certainly do not exist in terms of the former business model. This directly affects how companies transition from private to public, and is another factor that impacts cannabis stocks.
Few investment banks exist to advise entrepreneurs on why they need to focus on their weed stock price–not necessarily from the perspective of whether it is going up or down, but, rather, making sure the capital structure itself allows for a price that will benefit the company as it moves forward.
Those invested in the success of the marijuana industry and cannabis stocks are exploring alternative mechanisms as a result of banking obstacles.
These alternative mechanisms cannabis companies are researching are essentially a backdoor to being publicly traded through reverse mergers, Form 10 filings, and so on. These mechanisms are not traditional nor do they provide conditions for an orderly and well-run market.
Thus, smaller companies tend to be in the lower prices because traders who trade and make markets bid ask on the small, lower priced stocks. In short, some traders might associate a lower price with a better deal. For example, if a marijuana stock is trading in pennies, it is trading from $0.05 to $0.06, that penny spread represents 16 percent. If a trader can capture that 16 spread, she or he can make a considerable profit. Thus, some traders might be friendlier to companies with these lower prices because of the potential advantages they offer. When you see a less expensive stock, contemplate where that company could be in a few years. Let that projection guide your investment choices.
Be aware of any prejudices you might have against certain types of cannabis stocks.
There is sometimes a prejudice against low-priced stocks, but this might not always be a founded concern.
Some penny stocks are very good investments; some are not. The best way to determine how to select a pot stock is to do your due diligence, to speak with a company directly, or to even speak with a company’s customers. Gather as much information as you can so that you can make an informed decision about a cannabis stock in which you might be interested.
(To learn more about choosing weed stocks, read Seven Hot Pot Stocks.)