The cannabis industry has off late gained immense popularity owing to its recent legalization in some of the countries. This has not only opened the window of opportunities for cannabis ventures looking to make the most out of it, but also the investors who are looking to gain from the flourishing cannabis stocks. The global cannabis industry continues to surpass all expectations of growth making it the most sought after stock in recent times. A report by Grand View Market Research projects the legal cannabis market to be worth around $140 billion within the next seven years. Well, those numbers look quite impressive!
However, is the grass greener on the other side as well? Because the regulatory framework for regulating the cannabis is yet to be fully established, its market is quite volatile and prone to risks as well. Many new investors get attracted by stock promotion and hype or merely the appealing nature of the business but fail to analyze its financial conditions. Here is a list of the most common mistakes to be avoided while investing in cannabis ventures:
- Ignoring companies’ financial statements: Before investing in any company, the foremost thing an investor must do is to go through its annual reports or maybe press releases to decide whether the company is worth investing. The hype created by the cannabis industry has benefited even the losers for some time. These statements help you to determine whether their growth is momentary or it has the long-term growth potential.
- Investing out of speculation: As the cannabis industry is still very much in its infant stages, it is subject to high levels of volatility. Under such circumstances, it becomes challenging to distinguish the winners from the losers, and ultimately investors with little knowledge about the company may fail to realize any profit. The best way to avoid such a mistake is to leave aside speculative news and hypes and focus more on company based data.
- Failure to diversify: The most optimal way to make the most out of an investment is to diversify your portfolio as much as possible, especially in the cannabis sector which has minimal operating experience. A well-diversified portfolio will act as a safeguard against the potential losses. Betting solely on cannabis stocks would only increase the probability of incurring losses.
- Emphasis on too much diversification: While diversifying a portfolio is very much essential, but too much diversification can do little good. If a person invests in 20 stocks with negative expected returns, this can dilute his entire investment. Diversification should be kept at an optimal level with stocks distributed proportionately.
- Little knowledge about Cannabis investment: Cannabis stocks are OTC (Over The Counter) stocks. As exchanges like NSE and NASDAQ have very strict market-price and share-cap requirements, cannabis ventures find it difficult to list their stocks there. This makes these stocks even riskier as they are outside the regulatory purview of SEC. Therefore, complete knowledge about the company operations is vital to make an informed decision.