Reasons to Hold off on Marijuana Stock Investments

The legal cannabis landscape is changing dramatically. More states across the U.S. are moving to legalize both recreational and medicinal marijuana. Uruguay and Canada both legalized recreational marijuana use and Mexico is in line to make a federal move toward that step. On March 4, 2020, Mexico passed legislation to legalize cannabis in all forms, leaving lawmakers to vote on several key issues by mid-December 2020.

With signs indicating that legalization may happen in the U.S., North America is poised to become a global leader in the emerging marijuana industry. The industry may still be budding, but there are some estimates that promise stellar growth. According to California-based market research firm Grand View Research, the industry is expected to grow globally to $74 billion by 2027. Industry watchers expect the sector to grow to $24 billion by 2025 in the United States, according to New Frontier Data. Much of the growth in the cannabis industry can be credited to the influx of companies involved in the production, distribution, and study of legal cannabis.

Investors can choose to place their assets in a number of legal marijuana businesses. And yet, despite all of the hype, there are still reasons for investors to be cautious as they move forward. In this article, we break down four questions you should ask before investing in the legal cannabis industry.

When Will Marijuana Be Legalized in the U.S.?

Medical and recreational marijuana is legal to some degree in 35 states and the District of Columbia as of November 2020, along with U.S. territories of the Northern Mariana Islands and Guam. States on the west coast may have led the charge, but there are now regions throughout the country where individuals can grow and purchase marijuana legally.

Despite this, the prospect of a national effort to legalize marijuana remains elusive, even though individual states are moving in that direction. Investors should keep in mind that federal legalization is certainly not guaranteed. This means companies face highly disparate sets of regulations depending upon where in the country they operate.

How Will Marijuana Be Taxed?

A major point of contention in the debate over the legalization of marijuana is the question of taxes. Taxing marijuana sales stands to provide a tremendous economic boon for states where marijuana is legal. However, taxes mean an increase in the price of marijuana for the customer. If taxes are too high, or if the balance is not carefully maintained, demand could easily drop off. This would mean lower sales and potential losses for investors—not to mention cannabis-related companies.

How Are Marijuana Companies Valued?

Many of today's leading marijuana companies enjoy the benefits of high company valuations. Although that might be enough to convince some investors to get in on the game, it's important to remember that company valuations may be based largely on market hype. Because the marijuana industry is relatively new and untested, it is unclear whether the market valuations we see will settle down. If investors end up overestimating the potential of the legal cannabis sphere, it's likely that those valuations will eventually drop.

How Many Marijuana Companies Will Actually Make It?

Investors who want to take part in the legal cannabis industry should keep in mind that the field is quite crowded. Hundreds of companies are vying for dominance in a global industry that is under development and still in its infancy. In all likelihood, only a few of these companies will ever grow into major market players. Many others will likely maintain small operations or even shutter under market pressure. Some stocks are safer bets than others, but it's incredibly difficult for the everyday investor to predict which companies will come out on top or bottom.

The Bottom Line

Marijuana stocks are incredibly volatile. Every investment should, therefore, be taken with extreme caution. Although there are reasons to hesitate when it comes to investing in the legal cannabis industry, many investors also see tremendous opportunities. The question that remains to be seen is whether the potential rewards outweigh the risks involved. Unfortunately, that question can only be answered in retrospect.

Article Sources
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  1. Grand View Research. "Legal Marijuana Market Size Worth $73.6 Billion By 2027.

  2. New Frontier Data. "Report: America’s marijuana industry headed for $24 billion by 2025."

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