How to Invest in Marijuana Stocks

Investors looking for the next big opportunity are turning to one of the fastest-growing sectors of the economy. This of course is the cannabis industry and associated marijuana stocks.

There has been an explosion in sales in the states where voters approved marijuana use for both medicinal and recreation use, including Colorado, Washington and Oregon. With other states considering measures to make marijuana legal, the boom is expected to continue.

The sales of legal marijuana in the United States could hit $6.7 billion in 2016, according to an estimate from Forbes earlier this year. New Frontier Financials, which follows and provides data on the cannabis industry, expects industry sales to reach $15.2 billion by 2020.

But if you are looking to invest in the future growth of the cannabis industry, where should you put your money?

Opportunities for Marijuana Stocks & Industry Investment

The first thing to consider is that marijuana is still illegal at the federal level. While so far the federal government has allowed people to operate marijuana businesses in the states where voters made cannabis legal, there is always a possibility that could change after the election in November 2016.

That said, there are ample opportunities to put money into the industry.

Before investing in any company, make sure they are in compliance with the rules in their state regarding marijuana businesses. The regulations can be complex, and you will want to ensure that the business is on top of what needs to be done to remain compliant.

Not “Touching the Plant”

One strategy involves investing in companies that are not directly involved in growing or selling marijuana. This is what investors refer to as “not touching the plant.”

These business cover a broad swath of different industries. For example, the Capsule Consulting Group makes gelatin and vegetable-based bottles that marijuana businesses use to put marijuana in. Kush Bottles also makes containers for marijuana sellers, according to CNBC.

Another example is Canna Flavors, which makes extracts that can be used in any kind of baking. These are often used by cannabis companies to mask the taste of marijuana when they make edible marijuana foods.

Rick Gilchrist, co-founder of Frontier Financials Group, told CNBC that marketing and public relations companies that take on clients in the marijuana industry are also in demand.

That said, the biggest returns likely will come from businesses that deal directly with growing and selling cannabis. The higher the risk, the higher the reward.

Over the Counter Marijuana Stocks

Most of the half dozen public companies in the marijuana business are traded in the over the counter market. This is because it has less regulation and transparency than highly regulated exchanges such as the NASDAQ or New York Stock Exchange.

Some of those include Terra Tech, a California cannabis-focused agricultural company. Another is Medicine Man Technologies, which develops equipment designs that are sold to marijuana growers.

There are also funds that invest in the marijuana industry.

Investors have “a tremendous amount of homework to do,” Morgan Paxhia, co-founder and managing director at cannabis hedge fund Poseidon Asset Management, told U.S. News. “But, at the same time, we don’t want to turn people off from something that could be a huge winner.

“There’s no other marketplace that’s offering this much growth in the world.”

The bottom line for marijuana industry investment is that you must not only conduct the same due diligence you would with any stock. But, you must also go further and deeper. Such as, looking into the marijuana laws in the state where the business operates. Additionally, you must monitor the ongoing debate over federal regulation.

There are ample opportunities for those who are willing to take a risk. This is because the marijuana industry is expected to continue to grow by leaps and bounds in the coming year.