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Whether or not you’re personally interested in the use or application of cannabis, there’s no doubt that this market is prepared to boom in the coming years. Strategically adding some stocks to your portfolio could generate healthy returns.

Marijuana Market Overview

To say that there are certain connotations and assumptions associated with the marijuana market would be putting it lightly. Because of the historical treatment of marijuana and various state laws regarding production, sale, and consumption, some look down on this market and/or have reached misguided conclusions on the purpose it serves.

This market is growing and, as we learn more about the products within the industry, it’s becoming apparent that the upside and opportunities far outweigh the risk and downside.

If you’re looking for a general overview or breakdown of the market, you can split it up into three areas:

  • Marijuana growers and producers: This includes companies that cultivate marijuana, produce cannabis products, and distribute products.
  • Cannabis-focused drugmakers: Including pharmaceutical companies and cannabis-based biotech companies.
  • Ancillary product and service providers: These are companies that support marijuana growers and sell related products, accessories, and experiences.

“If you’re looking to buy equity in a marijuana-centric company, make sure you understand the market,” SmartAsset suggests. “Both marijuana products and marijuana stocks fall into different categories. In addition, though the product is now legal in many states, cannabis is still federally illegal. Therefore, this poses a considerable legal risk for investors.”

It’s also imperative that you understand the difference between the types of marijuana products that companies produce and sell. There are products that contain cannabidiol (CBD) and products that contain tetrahydrocannabinol (THC). Then there are products with both. CBD is legal in all states and does not produce a “high.” It’s commonly used to treat illnesses. THC, on the other hand, is the ingredient that gives a “high.” As such, it’s only legal in certain states at this time.

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Understanding each of these nuances will help you become a more informed and educated investor.

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Photo by Austin Distel via Unsplash

3 Tips for Finding the Right Marijuana Stocks

Marijuana stocks are all over the board. There are stocks selling for hundreds of dollars a share, as well as dozens of penny stocks that have no clear trajectory forward. The key is to understand what you want in your portfolio and know how to find stocks that fit this bill. Here are some suggestions to help you be successful:

Study the Numbers

When investing in marijuana stocks, you should always research the management team, explore the company’s growth strategy and position in the competitive marketplace, read through the company’s financials, and research details such as how many warrants and convertible securities the company has issued.

You can also use certain technical analyses to predict whether a stock is underpriced or overvalued. Fibonacci retracement trading is a good one.

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“Fibonacci retracement is useful because it’s a helpful tool to find patterns of movement and retracement between the highs and lows of an asset or contract,” RJO Futures mentions. “A Fibonacci level is created by taking two points from a chart, usually a high and low, and dividing those numbers by one of the ratios to create a key level.”

The more you learn to study stocks on a technical level like this, the less vulnerable you’ll be to emotional investing. In turn, you increase your chances of being successful over the long run.

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Photo by Darren415/Getty Images

Diversify Your Portfolio

When you’re investing in a market that’s as speculative as the marijuana space is, you have to be very well diversified. Spread your money out across multiple stocks, understanding that the upside on any one of your stocks is healthy enough to potentially offset losses on the others.

As you diversify, think about investing in different parts of the supply chain and market. This includes manufacturers, producers, drugmakers, recreational cannabis companies, etc.

Avoid Red Flags

With as much potential as this industry has, there are always going to be scammers out there. Thankfully, the SEC has issued specific alerts related to marijuana stocks. If something looks too good to be true, it probably is. Do your due diligence and keep an eye out for red flags.

Be Smart With Your Investments

You’ll notice that we didn’t give you any specific stocks or tickers to follow. That’s an intentional decision because this market is changing so quickly.

There are certain marijuana stocks that experts are bullish about, while there are others that many are bearish on. You won’t have to look very hard to find this information. However, at the end of the day, it’s up to you to make smart decisions based on your collective analysis.

To provide you with “three hot stocks” to invest in today would be doing you a disservice. Put in the work, be disciplined, and consider getting a little exposure in this area to balance out a well-diversified portfolio.

This article originally appeared on Green Market Report and has been reposted with permission.

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