When deciding whether to invest in stocks or not to, it is important to exercise caution. As Warren Buffett once said regarding investments, “Rule number one: Don’t lose money. Rule number two: Don’t forget rule number one,” every investor worth their salt must analyze emerging markets carefully to identify opportunities and inherent threats. This is true for marijuana stocks. This article explores the best practices when contemplating to invest in the cannabis industry, and the common pitfalls to avoid.

Understand the market players

If you are going to make any sound decisions on what pot stocks to invest in, you must take time to understand what makes up the cannabis industry. You will also need to know the key dynamics that spur or hinder its growth. By breaking down various elements of the market, you will be able to identify key indicators that signify the growth of a firm and consequently investment opportunities.

For instance, the performance of the cannabis business will highly depend on the final products and their ability to meet consumer needs. One of such products is cannabidiol, which has wide applications in developing curative drugs. With so much money being pumped to biotechnology research, more potent pot products are likely to hit the market in the near future. As an investor, you need to be informed of the new developments in the market and how new products will affect the cannabis industry.

There are also the growers of marijuana. These firms have contracts with pharmaceutical companies to grow and supply weed. When investing in such firms you will need to know what contracts, it has with its customers and its capability to produce the best quality marijuana.

Another important group of companies in this industry is the firms that support cannabis growers by providing farm inputs such as fertilizers, and farming equipment. If the marijuana industry is going to grow, then these firms will also experience tremendous growth. With the right research, you can identify ancillary companies that have great strategic positioning in the market and buy its stocks.

Understand industry key drivers

The number one determinant of the future of this industry is legislation. This covers everything from what form of marijuana is legal, where to consume it and in what condition. If more countries legalize both medical and recreational cannabis, there is a possibility that the industry will grow.

Marijuana is a commodity. It is important to note that it’s a new industry that is still at its infancy stages. Its steady growth, therefore, should not be assumed to continue infinitely. As you invest, you must think of what will happen in case of overproduction by farmers. Other factors such as climate change must be considered when making long-term commitments.

Know the companies well

As Thomas Hobbes once wrote, “scientia potentia est” – Latin for “knowledge is power”, taking time to analyze individuals companies in the marijuana business gives you the ability to know which firms have a promising future. For example, gathering information about key objectives of a firm, target market, strategic partners and financial performance helps you know whether it’s stable or not. You may also have to compare multiple companies to decide which one offers better returns with low risk.