Marijuana penny stocks have had some of the highest growth rates of any stocks in recent history.
However, they don’t come without major risks. Penny stocks typically have no profits and minimal operations, and overhyped marijuana penny stocks are no exception.
As with most penny stocks, they usually trade on the pink sheets or on FINRA’s over-the-counter bulletin board (OTCBB) and are not required to file with the Securities and Exchange Commission (SEC). These stocks have low liquidity, and in addition, volatility tends to be high. Bid-ask spreads are frequently large.
Why? It’s simply because penny stocks are low-priced shares of small companies.
In addition, penny stocks may trade infrequently, which means it might be tough to sell your marijuana penny stock shares after you buy them.
For a more in-depth overview of penny stocks, check out Benzinga’s Being Penny-Wise: All you Need to Know about Penny Stocks.
Riding the wave of legalized marijuana
Eight states (Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon and Washington) have adopted laws legalizing recreational marijuana use. In addition, a large handful of states, including the District of Columbia, allow state-regulated use of medical marijuana.
Therefore, about 65 million Americans live in states with some form of legalization.
Besides the benefit of skyrocketing value in marijuana stocks in the recent past, states also stand to gain significant tax revenue from marijuana. Since 2014, the government of Colorado has collected over $500 million in taxes.
Why people are investing in marijuana penny stocks
When investors and traders note success in an industry, it’s easy to understand their reasoning for getting into the market: they think they’ll make a lot of money, potentially quickly.
It’s important to tread carefully here, however. Penny stocks are sold by companies who are often headed for big financial trouble, and most marijuana companies have already been losing money even if they’ve experienced short-term interim success.
Over the past year: Top stocks
Unfortunately, in 2017 in the United States, not much excitement ensued in the marijuana industry, but Canada was a different story. Here’s a quick snapshot of one company:
Aurora Cannabis, Inc. (OTC: ACBFF)
This company’s stock went through the roof in 2017, exploding 170 percent. In fact, in 2018, it’s the fastest-growing medical cannabis company in North America, and is the second largest regulated producer in Canada. A long list of acquisitions in 2017 ended in Aurora’s cash plus marketable securities exceeding $500 million.
Canopy Growth (OTC: TWMJF)
Also a real leader in the medical cannabis market, Canopy Growth has many projects in the fire, including expanding its space to harbor its massive production and projects, including the export of cannabis to other countries which have legalized marijuana.
Emerald Health Therapeutics (OTC: EMHTF)
Offering a wide selection of cannabis products, including dried cannabis and cannabis oil, Emerald Health Therapeutics joined with Village Farms and through the joint venture, profitability will likely continue to increase.
For more in-depth coverage of marijuana stocks (not only penny stocks) read Benzinga’s Weed Stocks to Watch.
Penny stock risks
Where penny stocks “get people” is the cheap cost, yes, but also because of the “simple math” of penny stocks: that if you buy shares for $0.20, and if the stock goes up by $0.10, then your profit is at 50 percent—that’s the rosy, pie-in-the sky scenario. However, it’s just as easy (and likely, with these volatile stocks) for your $0.20 share to go down by $0.10 and lose 50 percent, instead.
Risks in the industry as a whole
Volatile. Illiquid. (These are two words that come to mind when you combine these three words: Marijuana penny stocks.) When they’re traded on the OTC exchanges, it’s a huge risk, especially when you’re dealing with companies who try to turn a profit on something that’s illegal. (Remember, in the United States, marijuana isn’t legal at the federal level. It’s still a Schedule 1 narcotic.)
Recently, Attorney General Jeff Sessions, a buzzkill for the marijuana industry in the United States, issued extermination of the enforcement of the laws in states where marijuana has been legalized. Marijuana companies took a hit, and understandably, marijuana stocks therefore encountered a massive shareholder dump.
There’s a fair amount of uncertainty about what might happen with the federal enforcement of U.S. marijuana laws, which translates into thoughts of, “Investors and traders must be crazy to even consider getting into penny stocks, and this industry in general.”
How to determine a good investment
If you’re determined to invest in marijuana penny stocks, it’s imperative that you ask yourself the following questions before you dive in. Thinking, “Pot’s popular. Let’s invest in that,” is a guaranteed way to head for trouble. Ultimately, a guarantee of proven track records amongst these marijuana companies can be a gamble. Here’s a great list of questions to ask yourself:
- Does the company have a growing revenue?
- Proven management teams?
- Expanding market share?
- Strong financial ratios?
- Are they overvalued?
Do your research prior to launching your marijuana penny stock investments. Check out another quick Benzinga primer: How to trade penny stocks.
How to "weed" through the noise
The Marijuana Index can be the launch pad for your entry into this very special market, as it showcases index trends and index news. Essentially, the Marijuana Index is a series of equally-weighted stock indices that track the leading cannabis stocks in the U.S. and Canada.
For more information about about penny stocks and penny stock trading, visit the U.S. Securities and Exchange Commission at www.sec.gov.