Medical Cannabis vs. Recreational Cannabis Stocks: What's the Difference?

Medical Cannabis vs. Recreational Cannabis Stocks: An Overview

The marijuana industry is broadly divided into two markets—medical and recreational marijuana. As their names suggest, both have applications in different industries and cater to different markets. Medical marijuana stocks represent companies that are involved in research and development (R&D) for the treatment of certain health conditions, while recreational cannabis companies cater to products that don't serve a medical purpose. Instead, their users seek the high that comes with smoking, consuming, or drinking cannabis.

More and more states are legalizing marijuana for either use case, and President Biden has signaled a willingness to loosen restrictions at the federal level. Depending on an investor’s risk profile and time horizon, stocks in both markets are attractive because they represent a growth opportunity. Keep reading to find out how these two markets differ from one another and how you can jump in as an investor.

Key Takeaways

  • Although it is used to treat medical conditions and symptoms, medical marijuana is still considered a controlled substance at the federal level in the U.S. - although President Biden has announced a willingness to loosen restrictions.
  • Marijuana, however, has been legalized or decriminalized now in several states.
  • Recreational marijuana caters to a larger market and has multiple applications from marijuana-infused beer to coffee and cigarettes. 
  • According to research, more spending is expected to take place in the recreational cannabis market as more states legalize it.

Medical Cannabis Stocks   

Medical cannabis is a type of therapy prescribed by doctors for health conditions and symptoms. This means patients can only access cannabis treatments with a prescription from their doctors. To date, the drug has been used to treat Alzheimer's, different forms of cancer, various mental health conditions, multiple sclerosis, nausea, and pain.

The industry has been moving forward since California became the first state to legalize medical pot in 1996. Research conducted in 2018 showed that Sanofi Aventis (SNY) and Merck (MRK) are among the top cannabis-related patent holders. Companies involved in the use of marijuana for medical uses are GW Pharmaceuticals (GWPH), Tilray (TLRY), Corbus Pharmaceuticals (CRBP), Cara Therapeutics (CARA), and Zynerba Pharmaceuticals (ZYNE).

The basic framework for evaluating medical marijuana stocks remains similar to that for the pharmaceutical industry, which means investors should focus on the company’s drug and research pipeline. Because research in cannabis is relatively new, it is safe to assume that the payback for investors in the industry will be longer as compared to recreational marijuana. Consider the fact that GW Pharmaceuticals spent 19 years researching cannabis chemicals before getting its first drug approval. Epidiolex was approved by the Food and Drug Administration (FDA) in 2018 to treat patients with severe epilepsy. The agency, however, has yet to approve medical marijuana as a whole. That's because the U.S. Drug Enforcement Administration (DEA) still lists marijuana as a controlled substance.

Getting into the market is as easy as any other industry. Investors may consider purchasing stock in companies researching or those that currently have medical marijuana on the market as mentioned above. Many are listed on stock exchanges like the Toronto Stock Exchange (TSX), while others are traded over-the-counter (OTC). Exchange-traded funds (ETFs) also offer exposure to the market such as the Alternative Harvest ETF, which includes companies such as GW Pharmaceuticals and Tilray.

Recreational Marijuana Stocks

Recreational marijuana caters to a larger audience. This translates into a potentially bigger market for this type of marijuana and is reflected in the exponential growth statistics for companies involved in this sector. The recreational marijuana industry primarily uses tetrahydrocannabinol (THC), a psychoactive agent that is responsible for the high that comes from smoking marijuana, for its products. It has multiple applications across products, from marijuana-infused beer and coffee to cigarettes. Instead of a medical purpose, the recreational cannabis industry markets the high that marijuana is known for and that many users seek.

Just like medical marijuana, there are stocks and other investments available in the recreational cannabis sector. The most prominent company involved in recreational marijuana is Canada's Canopy Growth (CGC). Others include Cresco Labs (CRLBF), GrowGeneration (GRWG), Sundial (SNDL), Jushi Holdings (JUSHF), TerrAscend (TRSSF), and Green Thumb Industires (GTBIF).

Countries Where Pot Is Legal

As of 2022, the countries of Canada, Georgia, Malta, Mexico, South Africa, Thailand, and Uruguay have fully legalized both medical and recreational cannabis for their citizens.

Other Considerations

Medicines and treatments that incorporate marijuana may find significant applications in government-paid health care like Medicare. A research paper from researchers at the University of Georgia found that prescription drug sales for painkillers “fell significantly” in states which legalized medical marijuana. The study showed that Part D, Medicare's prescription drug, saved roughly $165.2 million in 2013 in states that had legalized medical marijuana.

The variety of products available for recreational marijuana comes with a catch—hefty taxes. For example, Colorado charges a 15% excise tax for sales from cultivators to retailers and another 15% sales tax. This makes the final marijuana product fairly expensive, but can raise significant revenues for state coffers. Companies involved in recreational marijuana products will have to account for significant regulatory charges from governments on their balance sheets.

Industry Outlook

Investors and companies alike have been excited about the cannabis market. Once on the fringes of the financial world, cannabis companies are gaining more traction, with mainstream companies jumping on the marijuana bandwagon.

Uruguay was the first country to fully legalize pot in 2013, followed by Canada, which did so in 2018. While a few other countries have followed in the years since, many others have been slow to follow suit—partly because of the stigma still associated with marijuana use. Indeed, the drug remains illegal at the federal level in the United States, but attitudes are shifting. In 2022, President Biden expressed a willingness to decriminalize marijuana and issued a pardon for all federal prisoners held for simple marijuana possession. There is more leniency at the state level: As of the end of 2022, 21 states allow for personal consumption of marijuana, while 37 states allow medical usage.

This has major positive implications for the industry. According to industry reports, spending on legal cannabis is poised to grow: marijuana spending will reach $32 billion in 2022, and grow to $100 billion by the year 2030.

But, even as the sector racks up significant gains in the stock market, investor assessment of marijuana stocks is often colored by past stereotypes. Some investors still find it hard to jump in on the action, even with promises of big gains and increasing legitimacy.

What Is the Difference Between Medical and Recreational Marijuana Stocks?

Medical and recreational cannabis stocks represent companies involved in different sectors of the marijuana industry. Medical marijuana stocks focus on research and development for the treatment of certain health conditions, while recreational cannabis stocks cater to products that do not have a medical purpose and are used for their psychoactive effects. The markets for medical and recreational marijuana are also subject to different regulations and legal frameworks. Some companies may engage in both segments.

How Can Investors Get Exposed to the Marijuana Market in the U.S.?

Investors can get involved in the medical or recreational cannabis market by purchasing shares of publicly traded companies in the industry. Investors can also look to a marijuana-focused exchange-traded fund (ETF) or mutual fund. It is important for investors to thoroughly research the companies they are considering investing in and to carefully evaluate their potential risks and rewards.

What Should Investors Consider When Evaluating Marijuana Stocks?

When evaluating medical marijuana stocks, investors should consider factors such as the company's drug and research pipeline, its competitive position in the market, and the potential risks and rewards of its products. They should also consider the regulatory environment for medical marijuana and the potential for future changes in laws and policies that could impact the industry. Additionally, investors should consider the company's financial performance and management team, as well as its potential for growth and future profitability.

When evaluating recreational marijuana stocks, investors should also consider factors such as the size and growth potential of the market for recreational marijuana products along with the regulatory environment for recreational marijuana and the potential for future changes in laws and policies that could impact the industry.

The Bottom Line

The cannabis industry can be divided into two markets: medical and recreational marijuana. Medical marijuana stocks represent companies involved in research and development for the treatment of certain health conditions, while recreational cannabis stocks cater to products that do not have a medical purpose and are used for their psychoactive effects. In recent years, marijuana has become legalized in several states, allowing both markets to present opportunities for investors - but it is important for investors to carefully consider the potential risks and rewards of investing in each sector. Depending on an investor's risk profile and time horizon, stocks in both markets may be attractive because they each represent a growth opportunity.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. The White House. "A Proclamation on Granting Pardon for the Offense of Simple Possession of Marijuana."

  2. New Frontier Data. "Big Pharma Collects Most Canadian Cannabis Patents."

  3. U.S. Food & Drug Association. "FDA Approves First Drug Comprised of an Active Ingredient Derived from Marijuana to Treat Rare, Severe Forms of Epilepsy."

  4. Health Affairs. "Medical Marijuana Laws Reduce Prescription Medication Use In Medicare Part D."

  5. Colorado Department of Revenue. "Marijuana Excise Tax."

  6. Flowhub. "Cannabis Industry Statistics for 2022."

Take the Next Step to Invest
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.