Don’t Get Burned: 5 Must-Knows for Marijuana Stocks

Canada is scheduled to legalize recreational marijuana use in July 2018, making marijuana stocks in Canada a hot topic. Indeed, if rumors are true, even Warren Buffett is investing in the marijuana industry.

Recent reports demonstrate the amount of stock people are putting in marijuana stocks.

According to reports, back in 2014, Cubic Designs, a subsidiary of Buffett’s Berkshire Hathaway, sold its mezzanine structures to weed growers to allow them to maximize production space. Although this is likely not entirely true, it does tell us a bit about the excitement that marijuana stocks generates. Although the speculation that Warren Buffett is investing in marijuana stocks and companies is clearly blowing smoke, there is some information about weed stocks to invest in that should not be considered fake news.

Here are five tips to help weed out the untruths about marijuana stocks.

#1 – Read the marijuana stocks company’s filings.

If a company does not file with the U.S. Securities and Exchange Commission (SEC), you should not take it seriously as an investment option. However, if you pursue weed stocks to invest in, you should be aware that many marijuana stocks file at OTC Markets–not with the SEC–which requires more information. In fact, some of the most actively traded marijuana stocks, such as American Green (OTC: ERBB), Hemp, Inc. (OTC: HEMP), and Medical Marijuana, Inc. (MJNA), have never filed with the SEC.

Nevertheless, even if a company does file with the SEC, that does not mean that the weed stock is not risky or is not a scam. Enron regularly filed with the SEC, and we all know what Enron was really up to. However, watch for companies’ quarterly (10-Q) and annual (10-K) filings, as part of your due diligence as a marijuana stocks investor. Do not just rely on a company’s press releases; you will likely only get positive news, not the whole story.

#2 – If you come across new marijuana stocks to buy, always visit their websites in addition to reading the relevant filings.

Many fake pot companies will have poorly designed websites which will serve as a red flag. When investigating a company, be sure to look up its address (a virtual office or UPS store is a bad sign), call the listed phone number to verify it is working and not just going to voicemail, and check for stock photos being passed off as the company’s own employees or operations. You can check for stock photos by right clicking on the image and choose “Search Google for image.” If an image shows up on different websites, it is likely that this “company” is a scam.

#3 – Likewise, you should research a company’s executives when you are investigating weed stocks to buy.

Many reputable marijuana stocks and companies are relatively new and without extensive histories, making it difficult to judge them. However, there are ways to investigate a company’s board and staff that will give you insight into how reputable the company is.

For example, it is a bad sign if the company’s CEO has worked for other penny stock companies. To begin with, look at the CEO’s profile on LinkedIn. Next, conduct an internet search to see if that individual has a background that warrants being trusted with your investment. Marijuana stocks are a relatively new phenomenon, but that does not mean that you will be burned by your investment if you carefully research the company.

#4 – Watch for marijuana stock promotion when researching weed stocks to invest in.

This can take many forms, but the most injurious is when companies (or investors) pay for positive news and/or e-mail blasts. Luckily, there are free tools, such as StockPromoters.com, that can help you with this research. Also, be wary of marijuana stocks promoted by MarijuanaStocks.com, which has been known to take large payments to say great things about terrible companies.

#5 – Lastly, and most importantly, those seeking weed stocks to invest in should take the time to understand the financials.

This is a difficult task for all investors and especially so for people researching weed stocks to buy. Penny stocks fail because of their capital structure – desperate executives take on convertible notes with terrible terms. This debt converts to equity that is based on a future price, but, can lead to what’s known as a “death spiral,” in which a very small debt can result in the issuance of literally a billion shares, which can dilute or even wipe out existing shareholders. Penny stock fraudsters might also create convertible preferred shares that mask the true equity of a company. However, investors can read the filings (reference the #1 point on this list) to better understand these potential capital structure landmines.

As Canada is getting ready to legalize marijuana, this is a great time to invest in marijuana stocks in Canada.

As long as an investor does his or her due diligence and is careful, this could be a great way to add green to your investment portfolio. To learn more about great marijuana stocks to buy in Canada, read 3 Top Pot Stocks in Canada.