How to Invest in the Cannabis Industry?

posted by on July 17th 2013


One of the most telling signs that attitudes to cannabis are decisively shifting is the enormous hype that is currently being generated around legal cannabis companies, and the sheer number of new investors scrambling to get involved. But as with any fledgling industry, finding reputable companies to invest in can be difficult.

What Types of Cannabis Companies Are Out There?

How to Invest in the Cannabis Industry - 2. Equipment supply is just one example of a cannabis-related industry worth investing in

Equipment supply is just one example of a cannabis-related industry worth investing in (Choo Yut Shing)

Since the medical cannabis industry took off, hundreds of companies catering to all aspects of the cannabis industry have popped up – from mom-and-pop stores selling homemade hemp and cannabis treatments to huge dispensaries with thousands of customers – and there are many ways to invest in them. Some companies have floated on the stock market, and it is possible for any interested member of the public to buy shares; others may be run as private entities and may require a little more research and a hands-on approach.

As well as companies growing the medical cannabis plant itself, there are hundreds, if not thousands, of related service providers all across the country, and as more states relax their cannabis laws, more are popping up every few weeks. Related companies may provide the grow-room set up, provide specialised legal assistance, act as consultants in times of disease or infestation, manufacture equipment to assist with harvesting and processing, design and produce medical equipment for the end-user such as inhalers or vaporisers, produce extracts or edibles, or any number of other services.

Anything I Should Beware Of?

How to Invest in the Cannabis Industry - 2.  (zeepatel)

The cannabis market is currently in the early stages of growth, and can provide many opportunities to invest (Zeepatel)

It is worth remembering that investing in the cannabis market is not as easy as it may at first appear, and that many of the thousands of companies out there could be fly-by-night, flash-in-the-pan ventures that will disappear as quickly as they appeared. Furthermore, many cannabis companies are run by people who either have a limited background in traditional business or a limited background in the cannabis industry.

Due to the previous illegal status of cannabis, it is still hard to find businesspeople who have built up years of experience within the world of growing and trading in cannabis, just as it is unusual to find growers and breeders who have extensive business experience. However well-intentioned, many a cannabis startup is run by inexperienced, idealistic cannabis enthusiasts with little practical knowledge, and many soon fail.

As well as this, it is inevitable that unscrupulous individuals and criminal organisations will seek to take advantage of the capital currently flowing into the market, with no intention of fulfilling any promises made to shareholders. In such cases, recovering any money put into the company can be hugely problematic, if not impossible.

What to Look For in a Company?

As with any investment, it makes sense to look for companies that are reliable and profitable. As legal cannabis is a relatively new industry, it can be difficult to ascertain profitability and reliability on companies that are no more than a few years old at most.

On the other hand, the industry is enjoying a remarkable level of growth and at this stage, it is possible to invest in relatively risky companies and enjoy huge profits that will materialise very rapidly. This is not unusual for a new industry at this stage in its development, and it is this factor that attracts investors in such huge numbers compared with older, more stable sectors.

It should be possible to study the income statement, balance sheet and cash flow statement of any company you are considering investing in for whatever years are available. While this may not be as revealing as the accounts of a 20-year-old company, you can at least determine the company’s basic level of health and the extent of profits made thus far – which for many cannabis companies, may currently be very impressive.

From the balance sheet, you should also be able to work out the basic earnings per share – calculated by first subtracting dividends on preferred stock from net income, then dividing the result by the total number of outstanding shares – which is arguably the single most important factor in comparing investments.

Using an Investment Manager

For novice investors, sticking to the safest investments is often advisable. However, safe investments do not usually yield the most profit in the shortest time – for these results, high-risk investments such as many cannabis companies are currently offering are the weapon of choice.

So how can a novice investor hope to succeed in such a tough, risky game? The answer may be to look for an investment manager to choose investments and buy shares on your behalf, in return for a commission. There may be even be some form of protection in case of any loss; be sure to find out exactly what is on offer before signing any contract!

There are various investment management teams out there that specialise in the cannabis industry. An online search for “cannabis investment management” will yield hundreds of results, and again, it can be difficult to pick out the bad from the good. Make sure to check out forums and review sites to glean as much information as possible about the company you are considering.

How to Find Companies to Invest In?

How to Invest in the Cannabis Industry - 1. Make sure that negotiations are conducted face-to-face if possible (The Tax Haven)

Make sure that negotiations are conducted face-to-face if possible (The Tax Haven)

If you already have a company or companies in mind, be sure to thoroughly research all eventualities before making your investment. If not, there are dozens of websites that will give you comprehensive listings and stock information on thousands of cannabis companies. Most of these websites do not offer investment advice, and are independent of any cannabis company itself. However, there are others that will provide tips and targeted advice, often in return for a subscription, fee, or commission. Again, make sure to do as much research as possible, confer with other cannabis investors, seek advice on forums, and find a good, experienced legal team to assist you with your investments.

Seshata is a freelance cannabis writer currently based in Amsterdam, Netherlands
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