Recently, the Canadian Senate approved bill C-45 — also referred to as the Cannabis Act — which means that Canada is primed to become the first developed nation to legalize recreational cannabis use in adults.
With the bill’s passing, there’s an expected $5 billion revenue on top of medical marijuana sales and exports to countries that have also legalized medicinal cannabis.
But what does that mean for cannabis investors, and how can you invest responsibly during the excitement surrounding the industry?
In general, there are going to be a few important aspects of the market to consider as you make financial decisions going forward.
It’s Not Always About the Plant Itself
As exciting as it can be to invest in cannabis growers, the time to invest in them has already passed. This has been the case since the first wave of investors purchased stocks in medicinal cannabis growers, who can easily adapt for the new demand for recreational cannabis.
Instead, look for businesses that participate in the cannabis industry in ways outside of growing the crop itself. Marketing firms, packaging companies, software developers, and real estate partners are all types of businesses that can have a focus on the cannabis industry.
There’s Still A Market for Medicinal Products
If you are adamant about investing in growers, the soundest investment lies in medicinal products such as extracts and CBD oils.
While a niche market, pricing of these products are expected to remain consistent over time, so investing in growers that focus on these types of products offers more stability than recreational growers.
Here’s why: the issue recreational cannabis will face in the future is commoditization. This means that in a few years, the market will likely face an overproduction of recreational cannabis, which drives prices down and results in a net loss of profit.
Even with a recreational market coming into play, pharmaceutical and biotech investing remains lucrative and is expected to remain consistent.
Watch out for Stock Dilution
With an expected growth in the cannabis industry, something to be wary of is stock dilution.
Publicly traded companies looking for more investors can dilute the value of their shares by selling common stock, stock options, or convertible debentures, meaning you’ll have less ownership of the company and less say in investors’ meetings.
While not every company is expected to engage in these practices, the influx of new cannabis investors are going to entice some businesses into dilution.
Before investing in a company’s stocks, it’s always important to put in your due diligence and determine the most sound investments.