Can Marijuana Traders Handle A Stock Meltdown?
Even factoring in a rough conclusion, cannabis stocks had a phenomenal first quarter.
Being bullish on this sector could lead to huge gains if correctly positioned, but it also could mean detrimental losses if the sector is misplayed.
A lot of traders are ‘all in’ on cannabis stocks. There is no reason not to be bullish on marijuana stocks, but traders must recognize the potential risks.
The valuations of companies are challenging to understand for every stock in the sector. This isn't surprising, because canna-businesses are still in the very early stages of transforming from back-room operations to a publicly traded, big-money industry.
There is a ton of money flowing into the market, and much of it comes from novice investors that want to cash in on the ‘Green Rush.’
Investing in marijuana stocks is risky. Not only are valuations high (with off-the-charts positive sentiment), but with almost all of the stocks trading OTC (many "Pink"), disclosure is lacking.
Consequently, traders have to worry not only about the companies will be winners, but how realistic the valuations are. But these risks are inherent to all penny-stock investing.
Advanced Cannabis Solutions (OTC: CANN) and other marijuana companies that have been halted (such as Aventura Equities, Inc. (OTC: AVNE), PetroTech (OTC: PTOG) and Citadel EFT (OTC: CDFT)), have been a demonstration of the risk affiliated with trading marijuana stocks, serving as a great example of why traders must practice risk-management.
As with any new sector, cannabis stocks are likely to be very volatile. Traders must be prepared for this volatility. If not, it will be easy to buy high, panic and sell low. This is a sure-fire way to lose money. Traders that go all-in on the sector run the risk of seeing a pullback, and having no ability to buy low because they are already fully invested.
And, pullbacks are inevitable.
Traders that hold an individual security in large size take an even bigger risk. No one has a crystal ball, so diversified holdings are key.
No matter how confident in the market, always be prepared for a downswing. Don't put everything into the sector, and make sure that you holdings are diversified.
Understand valuations, use charts, and focus on quality (or at least understand where a company lacks it). Many of the dotcom winners are still below their crazy levels.
Remember that a good company and a good stock aren't the same thing, and don't be afraid to take some profits along the way.
Disclosure: The 420 Investor has no positions in any of the stocks mentioned.
© 2016 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.