How to trade or invest in the cannabis industry

Learn how the cannabis industry works

The cannabis industry is composed of all of the companies involved in providing marijuana products and services. Previously, it has been relatively untapped due to regulatory restrictions. But recently, as governments around the world have decided to legalise its use, a mainstream market has emerged that you can trade or invest in.

Learn the types of cannabis product

Broadly speaking, cannabis products are split into medical and recreational marijuana.

Most companies are involved in the production and development of medical marijuana – the unprocessed plant or products containing cannabinoids found in the plant. These are believed to alleviate the symptoms of diseases such as Alzheimer’s, cancer, epilepsy and multiple sclerosis. Medical marijuana has now been legalised in several countries around the world, including the UK, Canada, Germany and Australia. While it is legal in 30 US states, it is still illegal at the federal level.

The second classification is recreational cannabis, which is not used for medical purposes. If more countries follow countries such as Canada and Uruguay, and legalise recreational cannabis, there is the possibility that more companies will focus on this area of the market.

Learn the types of cannabis stock

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, there aren’t many 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 marijuana products to market. A lot of their drugs consist of synthetic forms of the cannabis – rather than the real product – but biotechs are often counted as marijuana stocks
• Supply providers: these companies provide all the tools and materials that are needed to grow marijuana, such as light systems, hydroponics, special soils and fertilisers

More recently, a lot of well-known food and beverage companies have also started to announce cannabis-infused products – including Heineken and Molson Coors Brewing Co. As policies continue to ease around the drug, it’s likely there will be even more types of cannabis stocks that traders and investors can gain exposure to.

Consider the potential risks and rewards of trading the cannabis industry

Potential rewards of trading the cannabis industry

The potential rewards of investing in the cannabis industry are the same as in any new market. That’s because there could be outsized returns for traders who can get in on the ground floor and take advantage of the rapid growth that is expected. In 2019, the global cannabis industry was worth $12 billion but by 2040, it’s estimated to hit $630 billion.

However, while there is potential for rapid growth, it is also important to be aware of the risks of trading the cannabis industry.

Potential risks of trading the 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 valuations do not necessarily reflect companies’ growth prospects and profitability. There is a lot of talk about the future of the cannabis industry, which is causing companies’ valuations to be based on optimism rather than current fundamentals.

The best way to mediate the risks of marijuana stocks is to do your research and identify which marijuana-linked assets are the riskiest. For example, Canada-based marijuana 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 marijuana stocks, others might be more comfortable in higher-risk circumstances.

Decide what cannabis asset you want to trade

Before you start to trade or invest in the marijuana industry, it is important to select which type of asset is best suited to your goals.

Cannabis stocks

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

Popular marijuana 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 index

You can trade cannabis as a stock index, exclusively with IG. Our Cannabis Index represents the gross total return of the world’s top 20 listed Canadian and US cannabis stocks – including Aurora Cannabis, Canopy Growth, Cronos Group and GW Pharmaceuticals.

Learn more about the Cannabis Index and how to trade it.

Cannabis ETFs

Alternatively, you could invest in or trade cannabis-linked ETFs, which are baskets of marijuana stocks designed to track the market. ETFs can be a great way to diversify your portfolio, as you’d be getting exposure to a range of cannabis stocks from just one position.

It is important to remember that most ETFs are passive investments – that means they seek to emulate the returns of the underlying assets, not outperform the market.

Discover the top cannabis ETFs to watch.

Choose whether to trade or invest in the cannabis industry

There are two routes to the financial markets: investing and trading. Below you’ll find a table summarising both methods, followed by more in-depth descriptions of each, to help you decide which is right for you.

Investing in the cannabis industry

Investing in cannabis is a popular way of taking a longer-term view of the marijuana industry. You’d buy cannabis stocks or invest in cannabis ETFs in the hope they increase in value and you can sell them for a higher price in the future.

Investing in the companies means that you have to put up the full value of your position up front. However, in doing so you’d gain shareholder rights and dividends if they are paid.

When you invest in an ETF, you’d be buying a share in the fund itself, paying the full value of the position upfront. While you wouldn’t get the same shareholder rights – such as voting powers – you could be eligible for any dividends paid (depending on the ETF).

With us, you’ll be able to take a range of companies involved in the production of medical cannabis products. Learn more about share dealing.

Trading the cannabis industry

If you want to trade both medical and recreational marijuana stocks, the cannabis index or ETFs, you can do so by:

Spread betting

Speculate on whether the price of marijuana stocks, ETFs or indices will rise or fall with spread bets.

The amount of profit or loss that you make will depend on how far the market goes in or against your chosen direction.

Both spread betting and CFD trading are leveraged products, 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.

Build a cannabis trading plan

A trading plan should outline what you want to achieve and the steps you’re going to take to meet your goals. You might want to consider:

• Your timeline
  You’ll need to think about how long you’ll be holding your positions for, and what style of trading this means you can employ. For example, if you only want to trade during the day, you’d want to look at shorter-term styles like day trading, scalping and swing trading
• Your strategy
  Setting the parameters for opening and closing each trade is vital to a trading plan. Your strategy will ensure you don’t enter trade or keep one open longer than you should do. For example ‘if the marijuana stock falls below X, I will buy, and if it rises above Y, I would sell.’
• A risk management plan
  A stop-loss order closes your trade once the market has moved against you by a certain amount, while a limit-close closes once you’ve hit your target profit. Both stops and limits are core components of a plan that aims to protect your capital
• Setting trading alerts
  You can stay up to date with market movements by setting personalised trading alerts. You’ll receive notifications whenever your chosen cannabis asset reaches your price target or moves by a certain amount – only available with IG

Open your first position and monitor the market

After you’ve opened your account, you can search for the market you’d like to trade on our platform. If you’re trading, you can then choose whether you want to ‘buy’ or ‘sell’ the underlying market, and your position size. If you’re investing, you’d just be opting to buy since you won’t be able to sell the shares until you own them.

Once your position is on the market, you’ll be able to see it clearly in your positions tab of My IG.

It’s important to remain up to date with any changes in the industry. Although the cannabis industry is predicted to experience increased growth, it is not a completely rosy outlook for the sector. So, keep an eye on breaking news and analysis with our news and trade ideas.

When you’re ready, you can close your trade by simply reversing your initial position (if you bought, you would sell and vice versa). Alternatively, if you have one-click dealing enabled, you can just hit the ‘close’ button next to your position.