One of the hottest new sectors for investors is the marijuana stock market. As with any new market, there is a great deal of confusion. This means that there is also a great opportunity for misinformation, costly mistakes, and even scams.

For those who are serious about jumping in on this hot, new market, caution is advised. With that in mind, we wanted to answer the most asked questions regarding marijuana stocks.

1. Isn’t marijuana illegal?

State Level
While cannabis has been around for thousands of years, it’s been illegal throughout most of the world over the last century. In the U.S., 33 states have legalized medical marijuana with 11 of those states allowing for recreational use. Medical marijuana is legal in more than 30 countries.

Federal Level
In the U.S., marijuana still remains illegal at the federal level. This creates some speculation on how exactly this conflict works. Many businesses that are legal at the state level have to operate as cash-only businesses and may have trouble getting proper bank accounts. With more states moving towards legalization, it’s only a matter of time before the federal government has to make a tough decision.

Right now, the biggest companies are based in Canada, but there is reason to support a number of U.S.-based companies.

2. What is the cannabis industry?

Marijuana has always been used for both medicine and recreation. Businesses in the industry typically focus on several areas:

  • Working directly with the plant: biotechnology, cultivation, and hemp or marijuana products.
  • Support: agriculture tech, real estate, or other secondary services.
  • Ancillary support: tech & media, investing, and consumptions devices

3. How do I invest in marijuana stocks?

Investing in these stocks is akin to investing in any other kind of stock sector. Investors should research the company’s leaders, strategy for growth, and how it sits in the competitive landscape. Look at the company’s investor relations websites. Keep in mind that this is a high-risk, but high-reward industry. Diversification and choosing companies that operate in other industries can help alleviate risk.

4. What are the risks when investing in marijuana stocks?

The entirety of the stock market has risks. There are, however, some risks that are specifically applicable to marijuana stocks. Here are a couple of unique risks you should consider:

Market caps for these stocks are very high when compared to historical sales. This means that if growth isn’t achieved rapidly, share prices could drop.

As a new industry, many marijuana companies aren’t yet profitable. This can not only cause uncertainty, but can result in dilution in stock prices when the companies create more stock in order to raise more capital.

U.S.-based companies face the risk of the federal government cracking down on states that have legalized medical and/or recreational marijuana.

5. Should I invest in marijuana stocks?

This is best answered by each individual and his/her tolerance for risk. A smart strategy would be to start small and let that fuel large investments. There is a great deal of momentum, so those who want to get involved would be best served by wisely jumping in now instead of waiting for everyone else to wise up.

Do you have any burning questions about marijuana stocks? Any tips that you’d like to share? Please comment below.