Investing in Cannabis: How it works

Business Insights

27/01/2021

Learning how to invest your money wisely is one thing, but branching into a new market such as cannabis, or otherwise known as ‘the green rush’ can be a challenge, mainly because the market is only just starting to mature and new legislations are being written and jurisdictions opening all over the world.

In this article, we’re going to provide you with a step-by-step guide on investing in cannabis opportunities and how it works.

Sophisticated investors usually know a thing or two about their own wealth management or building their investment portfolio… However the cannabis industry is somewhat unique and may be overlooked by risk-averse or unfamiliar investors; more comfortable with traditional asset classes such as stocks and bonds. But due to the current economic downturn, those considered as more ‘traditional’ investments have witnessed a decline compared with the thriving medicinal cannabis sector… the S&P 500 dropped 12% to 2,386.13 (15/3/20) — hitting its lowest level since December 2018 — while the Nasdaq Composite closed 12.3% lower at 6,904.59 in its worst day ever. [1] The FTSE 100 has also been through a turbulent time and suffered its worst daily drop since late March. [2] (11/6/20) According to City AM in recent news.

Yet the cannabis industry was deemed ‘COVID-recession proof’ and has thrived amid the pandemic, proving itself a robust and diverse opportunity for savvy investors.

Where to begin

The difference between medicinal & recreational cannabis opportunities?

Medicinal cannabis companies and stocks involve the cultivation and research and development that goes into producing a pharmaceutical product that is used to develop treatment for various health conditions. Whereas recreational companies focus solely on products that produce a ‘high’ for consumers, typically in countries that have legalised cannabis for both purposes.

Although that gives a broad overview of the two types of cannabis sectors, there are specialised or vertically integrated companies that have built an internal infrastructure including cannabis production across the seed-to-sale journey, these may include cultivators, retailers, cannabis-focused biotech’s and more.

Be prepared for risk

You may have come across the term “High risk = high reward” and due to the medicinal cannabis market infancy and the ever-changing global legislations against and for cannabis, this market is considered high risk but a good portfolio diversifier. It has been labelled a ‘Red hot market’ by Forbes [2] and one of the fastest-growing industries to be invested in.
Some investors receive ROIs of 100% or more over 6-18months, as the shares traded at prices that were multiples of the initial pre-IPO. Now, this may not be true of all opportunities: usually, when an investment is made, it is wise to expect a return or dividends within 3-5 years. [1]

The demand for medicinal cannabis is growing by the day as more and more people worldwide are noticing the benefits and how it can help mitigate a multitude of ailments to even more serious chronic conditions and diseases. Because of the demand, the market size is set to increase. In 2018, the global medical cannabis market was worth $13.4bn, with a projected compound annual growth rate of 26.4%; meaning its value could increase to $148bn by 2026. Sales of products containing CBD reached $1.9bn (€1.71bn) in 2018; and are expected to rise to $20bn (€17.98bn) by 2024.

Is a medicinal cannabis investment considered ethical?

When you invest in medicinal cannabis you are investing into a business that holds potential to produce a medicine that helps people lead better lives by improving their overall health and wellbeing. Read that line again.

The trend for investing ethically is widespread and in a focused study conducted over 10 years (2009-2019) including 2375 investors within the UK, the study revealed an increase in choosing a ‘new investment for its ethical values or product’. This area and rationale has grown by 7% and is particularly popular among young investors (18-34) – according to Statista.

When will I see returns?

You always need to balance your revenue expectations with those of your chosen investment opportunity, asset class and how mature that opportunity is, for example, Pre-IPO, early-stage, start up, series B etc. This will have an impact on your revenue expectations. Before you can begin to think about returns the business must first become operational, grow and harvest crop, secure off take agreements, manufacture and export, and then eventually list on the stock market, where your initial stake is set to increase by a considerable amount. It is wise to keep in close contact with the chosen business and stay involved and up to date with their progress.

References