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Things to Consider When Investing in Cannabis

Learn more about cannabis industry, key risks associated with investing in cannabis and points to consider before investing.

Legalization of Canada’s cannabis industry in 2018 created new investment opportunities that many Canadians were drawn to.  If you’re considering investing in the cannabis industry – either producers of cannabis or those providing supporting products or services – take time to do your research first so that you understand the risks associated with the investment.

Like many new industries, Cannabis stocks have experienced large price fluctuations, or volatility. Given the unsettled and often speculative nature of the industry, investing in cannabis can involve a higher level of risk compared to other investments.

This article discusses the cannabis industry, key risks associated with investing in cannabis and points to consider before investing.

What to Keep in Mind Before Investing in Cannabis

Investing in cannabis, just like any other investment, requires you to do your homework and make decisions according to your risk profile.

Here are six points to consider when looking into a cannabis investment:

1. Always do a background check on the company you want to invest in. This can reduce the chances of becoming a victim of investment fraud. Learn more about private placement market and researching public companies.

2. Consult a registered investment advisor. A registered advisor will be familiar with your financial situation and your long-term investment goals. If you’re a self-directed investor, it’s still a good idea to get independent advice from a registered professional. Learn more about managing your investments.

3. Ask questions about the company. If you don’t understand the investment or your questions are not being answered in a clear manner, it could be a sign of an investment scam. Learn more about the fraud warning signs.

4. Many companies are new and may not have the experience, knowledge or capital to become successful.

5. Although Canada has legalised cannabis, there is an ongoing legalisation conflict in the United States between state and federal governments. While legalisation of cannabis in the US may seem distant, the decision may affect the Canadian cannabis market.

6. To sell their shares, some companies may not be required to file a prospectus or disclose financial statements. This can increase the-risks associated with investing in cannabis.

What are Cannabis Investments?

There’s more to the cannabis sector than just a plant. A number of side industries have emerged, including businesses in the following areas:

  • Agriculture technology: businesses that help develop and improve equipment used to grow and harvest cannabis.
  • Biotechnology: businesses that focus on medicinal properties of the plant that could be used to help treat disease and illnesses.
  • Cannabis products: businesses that use extracts like cannabidiol to create various products.

Take some time to understand the cannabis sector and be sure it’s right for your investment goals and strategy before making any investment. Cannabis investments have generally been quite volatile, meaning that there is a greater risk you could lose all your money if you invest. As an investor, it’s important to understand your tolerance for loss and whether certain investments make sense for you.

It’s also best to stay away from comparing one industry to another for potential growth (e.g. cannabis vs. alcohol or tobacco). Each industry is unique and the companies operating in these sectors have different legal frameworks, opportunities, and business resources.  

Conclusions

Investing in the cannabis sector appears attractive to many retail investors. The best way to approach this or any investment is to take the time to make sure it fits with your goals and strategy or discuss it with a registered investment advisor and determine whether the investment is appropriate.

Report a Concern

If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Inquiries at 604-899-6854 or 1-800-373-6393, or through e-mail at [email protected]. You can also file a complaint or submit a tip anonymously using the BCSC’s online complaint form.

InvestRight.org is the British Columbia Securities Commission’s investor education website. Subscribe to receive email updates from BCSC InvestRight.

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