Click here for an update from The Motley Fool Co-Founders Tom and David Gardner.

Marijuana Stocks

Should you put your hard-earned money into marijuana stocks? We detail the investment opportunities, risks, and regulations in the cannabis space.

The marijuana industry is expected to triple in the next five years -- and many investors are looking to profit.

As states and entire countries decriminalize or legalize cannabis and/or its components, there are loads of opportunities for entrepreneurs and existing companies.

But as in any nascent industry, there are also loads of risks and bad actors. Whether you're a first-time investor or a seasoned veteran, it pays to understand all of the moving parts.

This guide will get you up to speed quickly.

How to Invest in Marijuana Stocks

Follow these seven steps if you're thinking about buying cannabis stocks. The following is a summary, but we encourage you to read the entire article linked below for all the details.

1. Understand the types of marijuana products.

  • There are two types of cannabis products: medical marijuana vs. recreational marijuana.
  • Cannabidiol (CBD) is a cannabinoid that is different than the psychoactive delta-9 tetrahydrocannabinol (THC).

2. Know the different types of marijuana stocks.

  • Marijuana growers like Canopy Growth Corporation (NYSE:CGC)
  • Cannabis-focused biotechs like GW Pharmaceuticals (NASDAQ:GWPH)
  • Providers of supporting products and services like Scotts Miracle-Gro (NYSE:SMG)

3. Understand the risks of investing in marijuana stocks.

  • Legal and political risks
  • Supply/demand imbalances
  • Risk in those that are over-the-counter stocks

4. Know what to look for in a marijuana stock.

  • Normal stock considerations, including:
    • Management team
    • Growth strategy
    • Competitive position
    • Financials (ideally either profitability or strong balance sheet)
  • Cannabis production costs
    • "All-in" cost of sales per gram
    • Cash cost per gram
  • For Canadian companies, the extent of international operations and distribution
  • Dilution risks via warrants and convertible securities

5. Evaluate the top marijuana stocks and exchange-traded funds (ETFs).

6. Invest carefully.

  • For many, avoiding individual investments in the marijuana space entirely is the right call.
  • For those who buy in, keeping your marijuana exposure to a small percentage of your overall portfolio limits your risk.
  • Pure plays are riskier than more diversified plays.

7. Monitor changing industry dynamics closely.

  • Laws, regulations, competitive forces, and the business strategies of the companies themselves will all change rapidly over time.

Read more: How to Invest in Marijuana Stocks (Note: includes a list of every major marijuana stock)

But, Really, Should I Buy Marijuana Stocks?

We just went step-by-step through how to invest in cannabis, but just because there's a trendy new sector with lots of press and potential growth doesn't mean you need to put your hard-earned money in it. After all, if you buy broad index funds, you're covered no matter what sector of the stock market does well.

Think through the pros and cons as you read on: Should You Invest in Marijuana Stocks?

Marijuana Legalization in the U.S.: The History and the Future

One of the biggest variables in cannabis investing is to what extent marijuana will be decriminalized or legalized within the United States, both on a state-by-state basis and on a federal basis.

The link below provides a quick spin through what we've seen so far, from decriminalization efforts starting in 1973 to legalization efforts beginning in earnest in 1996 to the political signs of where we seem to be heading.

Read on: Timeline for Marijuana Legalization in the United States: How the Dominoes Are Falling

More Information on Canadian Marijuana Stocks

There's been tremendous interest in Canadian cannabis stocks, because on October 17, 2018, recreational use of marijuana became legal in Canada (it had been legalized on a medical basis since 2001).

Beyond consumption by Canadians, the upside thesis involves operations or distribution to other countries that have legalized or may legalize marijuana to various extents. This includes Germany and particularly the large market on Canada's southern border.

Read on: Everything You Need to Know About Investing in Canadian Marijuana Stocks

Commonly Confused Cannabis Terms

One of the difficulties in understanding the marijuana industry is the jargon. Fortunately, it's not too complicated once you get a handle on a few main terms.

Marijuana vs. cannabis

Cannabis is the scientific name of the plant (the genus that houses three species). For an investor's purposes, marijuana is synonymous with cannabis, as are more informal nicknames like pot, weed, ganja, dope, grass, 420, sticky icky, etc.

CBD vs. THC

Cannabis is made up of nearly 500 chemical constituents, including many dozens of cannabinoids (substances that act on the body's cannabinoid receptors).

The two most commercially relevant of these cannabinoids are delta-9 tetrahydrocannabinol (THC) and cannabidiol (CBD). Only THC is psychoactive (i.e., makes you high).

Hemp

Hemp is a strain of a species of cannabis with relatively low levels of THC and relatively high levels of CBD. It has many industrial uses like providing fibers to make rope and clothing.

Recent articles

Cannabis Flower Bud Weed Pot Marijuana Grow Facility Greenhouse Legal Canada Getty

4 Canadian Pot Stocks Expected to Be Profitable in 2021

Canadian marijuana stocks have been hammered, but these select cannabis companies are on track to deliver the green next year.


Cannabis Buds Marijuana Weed Pot Cash Money Legal Canada US Getty

Marijuana's Billion-Dollar Pot Stocks: Only 7 Remain

Previous highfliers Aurora Cannabis and Tilray no longer make the list.


market crash

1 Pot Stock That's In Danger Of Being Delisted

Things could go from bad to worse for investors.


GettyImages-1139069347

More Bad News for KushCo Holdings in Q2

But the company's restructuring could help it make progress on a path to profitability.


Businessman Holds Dollar Sign Grass Pot Investing Getty

5 Top Stocks to Buy That Can Be 10-Baggers by 2030

Give these high-growth businesses 10 years, and they may reward you with a 1,000% gain.


Cannabis leaf in front of Canadian flag

Why Tilray Stock Is Soaring Today

A rising tide lifts all boats -- especially boats that short-sellers might be bailing out of.


Pile of cash

2 Pot Stocks Set To Survive the Coronavirus Pandemic

These companies have deep pockets and aren't in danger of running out of cash anytime soon.


marijuana

Why Aurora Cannabis Stock Lost 30% in March

Investors fled from riskier businesses as stock market volatility spiked last month.


congress building

Why Canadian Pot Stocks Are Safer Than U.S. Pot Stocks In The Coronavirus Market Crash

Many U.S.-based cannabis companies could be in danger of going under this year.


Cannabis Marijuana Weed Pot Bud Derivative CBD THC Liquid Canada Flag Getty

The Coronavirus Just Gut-Punched Canadian Pot Stocks

If you thought things couldn't possibly get worse for Canadian marijuana stocks, think again.


Stopwatch Time to Buy Stock Market Correction Getty

Take $100 and Open a Position in These 4 Stocks Now

This could be a once-in-a-generation opportunity to buy into great businesses at a discount.


cannabis against a grey background

3 Pot Stocks to Avoid as the Coronavirus Pandemic Continues

Cannabis companies are getting hard hit by the coronavirus. These three companies are getting the worst of it.


Essence dispensary

Green Thumb Industries President Resigns

Armen Yemenidjian is vacating the post, but will continue to advise the company.


GettyImages-668519916

OrganiGram Temporarily Lays Off 45% of Workers Due to Coronavirus Pandemic

The cannabis company is doing its part to increase social distancing.


Illinois road sign with cannabis leaf

Illionois Recreational Cannabis Sales Approach $110 Million in First Quarter of Legalization

March's $35.9 million revenue figure was close to the sales results for both January and February.


GettyImages-881904200

Coronavirus Market Crash: 2 Cannabis Stocks to Avoid

Here's why investors shouldn't bother buying shares of Aurora Cannabis and Hexo, even at their current levels.


canopy view

Why Aphria Stock Sank in March

The cannabis specialist's stock tumbled with the broader markets last month. Should investors take advantage of this weakness?


Game changer

Does Canopy Growth Have a Game-Changer? Constellation Brands Thinks So.

The adult-beverage giant is excited about something new from its cannabis partner.


Cannabis Plant Marijuana Pot Weed Dried Flower Legal Canada US Getty

Is Marijuana Stock Aurora Cannabis Headed to $0?

Could the most popular pot stock go from hero to (literally) zero in just over one year?


Cannabis dispensary sign

Why the Picture for Aurora Cannabis Just Got Bleaker

A bad situation in Ontario is now even worse.