How to invest in the cannabis industry

As more states and countries legalise cannabis – fuelled by greater acceptance from the public – there’s reason to believe that the cannabis industry’s prospects for continued growth look good.

In fact, research suggests that the US legal cannabis industry could be worth as much as $75 billion by 2030.¹ With forecasts like these, it’s no wonder that savvy traders and investors have been flocking to the market, eager to capitalise on the latest trending cannabis share CFDs.

How to trade in cannabis shares CFDs

Whether you decide you want to trade in cannabis shares CFDs, there are a variety of steps to consider before opening your first position:

1. Understand the different types of cannabis products
2. Learn about the types of cannabis stocks
3. Understand the risks of trading or investing in cannabis stocks
4. Choose the asset you want to focus on
5. Decide if you want to trade or invest in cannabis stocks
6. Pick your style and set your timeline
7. Open and monitor your position

Understand the different types of cannabis products

Broadly, there are two types of cannabis products that are fuelling the growth of the cannabis industry: medical and recreational cannabis.

Most companies are involved in the production and development of medical cannabis – either the unprocessed plant or products containing the cannabinoids found in the plant.¹ These are believed to alleviate the symptoms of diseases such as Alzheimer’s, cancer, epilepsy and multiple sclerosis.

The second classification of cannabis product is recreational cannabis – cannabis not used for medical purposes. If more countries follow Canada’s lead and legalise recreational cannabis, there is the possibility that more companies will focus on this area of the market.

Learn about the types of cannabis stocks

Depending on which type of cannabis product you want to focus on, there are a variety of different types of companies that you can look in to. The three main categories of cannabis stocks are:

• Growers: the companies that cultivate, sell and distribute cannabis to consumers and businesses. Due to legal constraints, US-based growers are not large players in this space. However, some Canadian growers have had relatively substantial market caps since the legalisation of cannabis in October 2018
• Biotechs: these firms are dedicated to developing and bringing medical cannabis products to market. Although they do not always work with cannabis at all, since many of their drugs consist of synthetic forms of the substance, biotechs are still often counted as cannabis stocks
• Supply providers: these companies do not grow or use any element of cannabis – real or artificial – in their products. Instead, these businesses provide all the tools and materials that are needed to physically grow cannabis, such as light systems, hydroponics, special soils and fertilisers

Understand the risks of trading or investing in cannabis industry

The growth of the cannabis industry is relatively recent, and the sudden interest in the sector has led to valuation risks. Cannabis stocks have increased in price so rapidly that the valuations do not necessarily reflect the company’s growth prospects and profitability. There is a lot of talk about the future of the cannabis industry, which is potentially causing a lot more excitement than the current state of play deserves.

The best way to mediate the risks of cannabis stocks is to do your research and identify which cannabis-linked assets are the riskiest. For example, Canada-based cannabis companies do not face all of the same risks as those within the US industry, due to the legal landscape.

It is also important to understand that each investor and trader will have different financial goals and risk tolerances. While some individuals might not be interested in the volatility of cannabis stocks, others might be more comfortable in higher-risk circumstances.

Choose the asset you want to focus on

Before you start to trade or invest in the cannabis industry, it is important to do your research and carefully select which type of asset is best suited to your goals. There are two common ways to gain exposure to the cannabis industry: share CFDs and exchange traded funds (ETFs).

Cannabis stocks

Cannabis stocks are the shares of publicly traded cannabis companies. These companies previously struggled to be accepted by stock exchanges, but since the move toward legalisation there are now cannabis stocks on the New York Stock Exchange (NYSE), the NASDAQ and the Toronto Stock Exchange (TSX).

Five of the most talked about cannabis stocks include:

• Canopy Growth Corp (CGC): a research and development-focused cannabis company, which listed on the NYSE in May 2018
• Cronos Group (CRON): a cannabis grower and distributer that listed on the NASDAQ in March 2018
• Aurora Cannabis (ABC): a cannabis producer, initially listed on the TSX with a subsequent listing on the NYSE in October 2018
• Tilray Corp (TLRY): a pharmaceutical company and cannabis grower, which was the first cannabis firm to list on the NASAQ in July 2018
• HEXO Corp (HEXO): a company focused on the creation and distribution of cannabis to the recreational market. It listed on the TSX in June 2018

Take an in-depth look at the top marijuana stocks to watch

Cannabis ETFs

Alternatively, you could trade cannabis-linked ETFs, which are baskets of cannabis stocks designed to track the market. This can give you a far more diverse exposure to the industry. There are two popular ETFs that trade on major exchanges. These are:

• LARE-US was initially a Latin American real-estate ETF but changed its focus to cannabis stocks in 2018. It tracks nearly 40 stocks including producing companies and biotech firms, as well as some large tobacco companies. The ETF holds shares of Tilray, Canopy Growth, HEXO, Cronos Group and Aurora Cannabis, which has made it one of the most popular cannabis ETFs on the market
• Horizons Marijuana Life Sciences ETF is focused on the medicinal uses of cannabis and tracks around 28 different cannabis stocks. However, most of the ETF’s value comes from just five of its holdings: Aurora Cannabis, Canopy Growth, Aphria Inc, MedReleaf Corp and Scotts Miracle-Gro

Decide if you want to trade or invest in cannabis stocks

There are two routes to the financial markets: investing and trading. Your decision of whether to invest in cannabis stocks or trade on their price should be based on which option best suits your needs and preferences.

Trade in cannabis industry

If you want to take a longer-term view of the cannabis industry, you can buy and sell key cannabis share CFDs or trade in cannabis ETFs with our share trading service. Investing in the companies means that you have to put up the full value of your position up front, but that you gain shareholder rights and dividends if they are paid. You can use our share trading service to invest in a range of cannabis stocks, including:

• Canopy Growth Corp
• GW Pharmaceuticals
• Cara Therapeutics
• Innovative Industrial Properties

Trading cannabis stocks

If you decide to trade cannabis stocks and ETFs instead, there is one main way to trade: CFDs.

When you trade a CFD on a cannabis stock, you are agreeing to exchange the difference in the price of the cannabis stock between when the position is opened and when it is closed. CFDs are particularly useful for hedging existing positions in your portfolio.

Two of the cannabis-related stocks that you can trade CFDs on are:

• GW Pharmaceuticals
• Cara Therapeutics

CFD trading is a leveraged product, which means that you only need to put down a fraction of the value of your position in order to gain full market exposure. Leverage can bring the possibility of magnified profits, but also magnified losses.

Another reason trading cannabis stocks is increasingly popular, is that you can trade on the shares of companies that you believe will fall in value as well as those you believe are going to rise. This provides you with more opportunities to take advantage of volatile markets.

Pick your style and set your timeline

Once you have decided whether to trade or invest, you will need to create a detailed trading plan to establish how you will generate profit, and settle on a methodology for entering and exiting positions.

If you decide to trade in cannabis stocks, it is likely that you will stick to the ‘buy and hold’ method, which involves keeping your position open for a long period of time, often years at a time. But if you decide to trade cannabis stocks there are variety of styles for you to choose from:

• Day trading is the practice of buying and selling assets within a single trading day, taking quick and frequent profits from small price movements
• Scalping is a type of day trading that involves the opening and closing of positions quickly – within seconds, or at most a few minutes
• Swing trading is the practice of entering trades at the point the market is expected to change direction, with the aim of profiting from movements in an asset’s price
• Position trading involves holding a position over a longer period of time, be it weeks, months or even years, to profit from large shifts in price

Your decision about your trading style will depend on how much time you want to spend monitoring the markets and what your timeline is. Your timeline should cover what your entry and exit points for your positions would be, for example ‘if the cannabis stock falls below X, I will buy, and if it rises above Y, I would sell.’

Open and monitor your position

Now it’s time to take your first position. When you invest in cannabis stocks, you buy the asset in the hope that it will rise in price and you can sell it for a profit. But when you trade cannabis stocks you have the option of ‘going long’ to mimic buying a stock, or ‘going short’ if you think it will fall in value.

When opening your position, it is important to consider how you will prepare for and restrict potential losses – this is known as a risk management strategy.

¹ Cowen & Co, 2018