Cannabis legalization made waves in the US in 2021. Over the course of the year, more than 50 pieces of marijuana reform legislation went into effect in half of the nation’s states. Still, cannabis remains a Schedule I drug alongside heroin at the federal level, meaning US-based companies don’t often list on domestic stock exchanges like the NYSE and Nasdaq.
For retail investors, marijuana investing can feel confusing, so we’re demystifying the process. Here’s how to invest in US and Canadian marijuana stocks and ETFs.
TL;DR
- So-called “pot stocks” are much more than growers and sellers. The cannabis industry consists of real estate investment trusts, biotech companies, and everything in between.
It’s complex: Investing in US and Canadian marijuana companies
Part of stock market democratization is widening the industries you can invest in. Now, that includes cannabis companies. When talking about these brands, we’re referring to three main types of businesses:
- Cannabis biotech
- Ancillary services and product providers
- Growers and retailers
Companies can be cannabis-touching or fully in the cannabis field.
Major US stock exchanges (NYSE and Nasdaq) opened up listing applications from US and Canadian marijuana companies in 2018. However, the SEC (Securities & Exchange Commission) remains extremely strict for businesses in the cannabis industry, especially those in the US where it’s federally illegal. One of the only NYSE cannabis listings, Canadian-born Hexo Corp. (NASDAQ:HEXO) transferred its stock from the NYSE to Nasdaq in August 2021 to help inflate shareholder value.
For regulators, factors like whether a company works with medical or recreational marjuana, what state(s) it operates in, and how it handles its finances all come into play. That’s why the vast majority of US cannabis companies list in other markets, like OTC (over-the-counter) markets and the TSX (Toronto Stock Exchange).
Other factors include:
- Marijuana companies often have difficulty staying compliant with an exchange’s stock price minimums. These companies know that people could perceive them performing reverse stock splits to stay afloat as dodgy.
- The OTC markets are the next best thing. It’s less hassle and more affordable, plus there are no stock price minimums.
- Cannabis companies face lots of legal risk. Many feel they have enough to worry about without maintaining a major listing.
On the flip side, recreational marijuana became federally legal in Canada in October 2018. Because the laws are simpler, Canadian cannabis companies will often list on a US exchange in addition to having a domestic listing. These companies have less loopholes to jump through, which makes it easier to raise money through institutional or retail investors and frees up their liquidity in the long run.
Investing in US cannabis companies
Usually, OTC markets cater to more unstable stocks. Many are called “penny stocks” because of their low share price. but US cannabis stocks are in a unique position. Since it’s often easier for those in the marijuana industry to list OTC, their over-the-counter listing doesn’t inherently make them more volatile or less lucrative.
Colorado-based GrowGeneration Corp. has a Nasdaq listing. The company has been public since 2016 and gained about 596% of value in its lifetime through November 2021. It has yet to return to its peak market cap, but its $16+ share value is far enough for comfort from the Nasdaq’s minimum.
Even Uber is now a cannabis-touching stock. The rideshare mogul recently launched weed pickup in certain Ontario dispensaries through the UberEats app. The company hopes to expand its program soon, potentially to the US.
There’s also California-based Innovative Industrial Properties, a real estate investment trust (REIT) nicknamed the marijuana industry’s landlord. Its stock has grown more than 1,300% since going public on the NYSE in 2016.
Investors should be aware that lower trading activity and muddied legalities can interfere with any cannabis investment.
Some US listings are cautionary tales. In January 2021, Jay-Z’s cannabis company The Parent Co. (or TPCO Holding Corp.) went public on the OTC markets through a merger with a SPAC (special purpose acquisition company). The stock lost about 86% of its value in the following 10.5 months and has yet to recoup the losses, though it’s still early in TPCO’s publicly traded lifetime.
Investing in Canadian marijuana companies
Whereas US cannabis companies are hard to come by on a major exchange, neighboring Canadian businesses are frequently listed on the NYSE. This means many US investors are interested in stocks like:
- Tilray: Barron’s reported in November 2021 that a pension fund went in on Ontario-based Tilray and other popular stocks. Even with federal legalization out of the question for the remainder of the year, some are remaining bullish for the long term.
- Sundial Growers: The Alberta-based company pairs cannabis sales with investment income, though its revenue is slow-paced.
- Aurora Cannabis: An Edmonton-founded brand, experts often consider Aurora to be underperforming based on its book value. That doesn’t necessarily mean its market value will grow to reflect that, though.
Cannabis ETFs make it easier to invest
Thematic ETFs (exchange-traded funds) help investors make impactful stock buying decisions while maintaining a certain level of diversification. Under the cannabis theme, top ETFs include:
What risk do you take on in marijuana stock trading?
In cannabis investing, retail traders have the opportunity to capitalize on early industry growth. Still, investors take on the risk of legalities crushing operations and rendering investments worthless, or falling victim to scams that prey on trending industries.
The SEC put out a warning in 2018 when cannabis investing first went mainstream, writing, “Scam artists often exploit ‘hot’ industries to trick investors, including by making false promises of high returns with low risks.” At the same time, the US Department of Justice shared a continued belief that marijuana is dangerous and criminal.
Bottom line
The latest cannabis investing news shows progress. Even in Kentucky, a historically marijuana-hesitant state, numerous cannabis legalization bills are on the table for 2022. Muddied waters can deter investors from trading cannabis stocks, which is why it’s so crucial to clarify the process.
After all, knowledge is power—especially when it comes to stock trading. This rings true for cannabis investing, too.