Pot Stock Caution: Prudence Required

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Wouldn’t you have loved to invest in Apple when its stock was around $1? Or better yet, wouldn’t you have loved to invest in Google when it was just a scrappy startup? Every day investors look at their stocks and wonder: is this going to be the next big thing? When you are researching potential stocks to buy, it is only natural for your eyes to light up when you see a cannabis-related stock. You may initially think, “Oh boy, this stock is going to be huge!” Don’t let yourself be fooled. While cannabis legalization is almost guaranteed, the success of any marijuana stock is dubious for the time being.

When some people think of a marijuana businessman, they think of the dreadlocked Rasta man singing sweet songs to his plants, making money hand over fist and operating an honest business; in many instances, they would be right. What some excited investors forget is that the stock trade can sometimes produce the shadiest “legitimate” businesses, and sadly this is the current state of the marijuana stock trade.

You may remember in March when the SEC suspended the trading of stock for Advanced Cannabis Solutions over concerns that some of the traders engaged in unlawful distribution of securities. Or, if you don’t remember that, you may remember in April when the SEC suspended the stock of GrowLife because of “questions that have been raised about the accuracy and adequacy of information in the marketplace and potentially manipulative transactions in PHOT’s common stock.” Trading of GrowLife’s stock has resumed, but has fallen in value since the lifting of its suspension.

Part of the reason why the SEC has been cracking down on these companies and why others are nervous is that most of these cannabis and cannabis-related stocks are traded as penny stocks and do not go public as an IPO. Penny stocks are dangerous to the enthusiastic stock trader because there are too few protections and regulations governing the penny stock trade. Many purchasers of penny stocks fall victim to the old Pump and Dump scam where individuals buy up a stock, over inflate its value with promises and cajoling, and then leave investors high and dry with a worthless stock (think “The Wolf of Wall Street”).

This is not to say that GrowLife, Advanced Cannabis Solutions or any other cannabis stock is a scam; this is to say investors need to be more circumspect of how they invest in marijuana. It is too easy to get excited at the idea of marijuana becoming a billion dollar industry and then to throw capital at any cannabis venture that looks half-way legitimate. At this stage of the budding marijuana industry, you should not focus your investment energy on penny stocks. Still a little skeptical? Here are some marijuana stocks that started off the year on a high note, according to The Slant:

  • Hemp (HEMP): Dropped more than 75 percent from its peak in February.
  • Cannabis Science (CBIS): Dropped more than 60 percent from its peak in February.
  • Medical Marijuana (MJNA): Dropped more than 50 percent from its peak in January.
  • Tranzbyte Corporation (ERBB): Dropped more than 70 percent from its peak in March.

Everyone wants to be the person that bought into a billion dollar company when it was trading for peanuts, but when you think about all those huge companies like Apple, Google and Microsoft, ask yourself this: were they trading stocks at the very beginning? The answer is no. If entrepreneurs want to make their fortune in cannabis, the money is not on Wall Street…yet.

To get in on the ground floor of the soon-to-be booming cannabis industry, investors need to focus their money on individual businesses. Herbal entrepreneurs are dying for more capital to be injected into the market, but many banks and investors are still reluctant to fund marijuana ventures. While this is bad for the small canna-business owner, this presents the perfect opportunity for the forward thinking investor to claim a big stake in what should be a big market.

William Sumner, a freelance writer and marijuana journalist, was a staff writer for MJINews from May 2014 through February 2018. You can follow him on Twitter @W_Sumner.

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