As California joins the ranks of one of the very few states in the U.S. to have legalized the use of marijuana both recreationally and medically, the cannabis market is buzzing with excitement. Just recently, in March 2017, Los Angeles voters approved of Measure M, a city sponsor measure to help provide regulations for adult-use marijuana for safer and more accessible use.

As the plant becomes more widely acknowledged legally, investors are eager to participate in marijuana investments, not being aware of some concerns regarding the market. An example of such an incident was the Colorado effect. When Colorado legalized marijuana to be used recreationally and legally, the stocks rose dramatically. Shell companies — inactive companies that are used for various financial manipulations — would add buzzwords such as marijuana or cannabis or green in its stock titles and it’d grow beyond belief.

Besides shell companies, other companies would sell stock with questionable information. An example is the stocks traded by Growlife, Inc (OTCMKTS:$PHOT), who had $8 million in revenue but a market cap of $850 million. The stock of the company traded at a price over 50 cents in 2014 before the trading of the stock was suspended because of concerns over the accuracy of the company’s given information.

Besides companies trying to deceive those getting into marijuana investments, another problem with marijuana stocks is that they all trade with dependency on the other stocks. For example, the entire group of stocks will drop if someone important politically or in the media says something that is seen as negative to the marijuana industry. Many of the marijuana stocks do not rise and fall on their own terms, but instead with the news and/or media.

While there is enthusiasm and desire — especially among young investors — to get into marijuana investing, it is still really important to do research and have a thorough knowledge of the industry before doing so. Below are some things you should know before getting into marijuana investments.

Revenue numbers

Before choosing which marijuana stock to invest in, read the company’s stock filings. Stock filings can be found on the Securities Exchange Commission site or any other exchange sites. Yahoo and Google Finance pages also provide basic information on the companies.
Barry Clark, CEO of the pharmaceutical/research marijuana company FlowerKist, tells would-be marijuana investors to check revenue figures to ensure that the company is earning some kind of profit. During the Colorado effect, many stocks traded based simply on an idea, or from a company that had certain buzzwords in their name but no real business to support the company itself, much less the stock.

‘Positive’ reviews

Some traders purchase stocks and then promote positive write-ups about the company to help bump up the stock price. When the price goes up, the traders will sell their shares to unsuspecting investors and gain profit. To avoid such a situation, Clark gives investors some advice.

“Before you jump in and buy, check sites like stockpromoters.com and see if it shows up there as a highly promoted stock,” he said.

A Facebook page called Fabulous Penny Stocks is also to be avoided, Clark said, as they have been known to be actively promoting stocks.

Legitimacy

Like with any stock you choose to invest in, make sure that the company is well-managed. With a growing industry like marijuana, this can be a little tricky. Besides thorough research, Clark tells investors that the best way to check how a company is being managed is to call them. If your phone goes to voicemail, the mailbox of the voice mail is full, or no one answers your call or gets back to you, it’s a bad sign, Clark states.

If phone calls aren’t your thing, see if the management of the company you want to invest in is selling their shares of the company. You can do so through websites such as Yahoo Finance. If the management is selling their shares, it indicates that they believe the company will not do well.

Note the exchange

There are many companies that are associated with the cannabis industry that are on more major exchanges such as Nasdaq or the New York Stock Exchange (NYSE). If you are looking for “true” marijuana stocks to invest in, avoid companies such as GW Pharmaceuticals (NASDAQ:$GWPH), Insys Therapeutics (NASDAQ:$INSY), and Zynerba (NASDAQ:$ZYNE), as they are viewed more as biotech companies by cannabis industry insiders. Another example is Innovative Industrial Properties, which trades on the NYSE. The company invests in growing facilities and is viewed largely as a real estate company. However, if you are unsure about marijuana investing or want to take fewer risks, these companies may be a good start on your marijuana investments.

Most true marijuana stocks are traded in the over-the-counter market instead of major exchanges. As a result, the stocks have varying levels of transparency; thus Clark advises investors to stay with companies at the OTC QX and/or QB level, and to avoid pink sheets stocks completely.

Be wary of all that sunshine

Too much good news can be a bad thing when it comes to marijuana investments. Be alert: if the stock you have invested in is always doing well, it may be time to ask some questions. As well, if a company issues press releases weekly or even daily, you should double check on its legitimacy. Legitimate companies will only hold press releases if there are actual news regarding the company to be released — and this is not on a daily basis, considering how long it takes for products to be planned and implemented.

Watch out for newsletters and marijuana news websites that only put out the positive press for certain companies, as they may be getting paid to do so. No matter what, every company will experience bad press, even if they are the best.

Like all other investments, marijuana investments require a lot of research, caution, and thought. Do not jump into it simply because it is now gaining traction and making lots of money — like all other markets, the marijuana industry can also be unpredictable. Because it is a growing industry, take more time before deciding which marijuana stocks to invest in.

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