Investing in Marijuana: The Routes In, the Segments, and the Legal Risk

Owning a piece of legal marijuana can mean owning a farm, a drug developer, or a company that sells hydroponic gear and packaging to everyone else in the business.

Those three carry very different amounts of legal exposure, and they don't all trade in the same places. Some sit on the NYSE or NASDAQ. Others trade in Canada or over the counter, where an ordinary brokerage account may not reach them.

Two Routes In: Individual Shares or a Fund of Them

Under the first, nothing gets bought until you've done the digging yourself, company by company or fund by fund, and settled on what you want to own.

The second route is an ETF. Buy one and the money goes into a fund that already owns a mix of assets, frequently shares in a number of cannabis companies, so a single order covers several businesses at once. Day to day, that usually asks less of an owner than a portfolio of hand-picked names.

Two features of ETFs matter before setting one against single stocks. They charge an expense ratio, an annual cost skimmed from the fund's assets, and their holdings change over time as the underlying index is rebalanced. The mix you buy today isn't necessarily the mix you hold in two years, and the fund's current holdings list is the only way to see what the label actually covers.

Major Exchanges, Canadian Listings, and OTC Access

Any online brokerage account will normally handle a cannabis stock or ETF listed on the NASDAQ or the NYSE. Plenty of the industry sits elsewhere:

• Some marijuana stocks trade on Canada's stock exchange rather than a U.S. one.
• Others are penny stocks that trade over the counter, with no formal exchange listing. Buying them means going through a broker-dealer network instead.

Brokerage platforms differ in what they support. Someone who opens an account, funds it, and then searches for a Canadian-listed grower may find the ticker isn't available to trade there at all, or that OTC orders carry extra handling.

Access to Canadian listings and penny stocks is a question that belongs in choosing the brokerage, not after the account is open.

Fractional Shares and the $1 Starting Position

Investing apps that offer fractional shares change the arithmetic of a first purchase: the order gets sized in dollars rather than in shares, and whatever slice of a share that money buys is what lands in the account.

On Stash, whose fractional-share ETFs include a fund called Corporate Cannabis, $1 is enough to open a position. For someone who doesn't want to vet individual companies, a single fund purchase spreads exposure across many businesses in the sector at once.

State Legalization Doesn't Cancel Federal Risk

Most of the U.S. has legalized marijuana at least in part, more commonly for medical use than for recreational use. State law isn't the whole picture, though. If federal enforcement tightens, cannabis companies could find it harder to operate and harder to turn a profit, regardless of what the states around them allow. That overhang applies across the sector, and no company's own numbers offset it.

Penny Stocks, Thin Disclosure, and Lookalike Tickers

Over-the-counter shares live under a lighter rulebook. A company that never lists on an exchange has no obligation to publish the detailed financials the NYSE demands of the companies on its board, and the oversight is thinner across the board. Less information means a higher chance of losing most or all of an investment if the business performs badly.

There's a related pitfall in the thinly traded corners of any hot theme. A company name or ticker that sounds like it belongs to the industry isn't proof of real operations, revenue, or licensing, and with little required disclosure, verifying what a company actually does can be difficult.

The Three Segments: Growers, Biotech, and Ancillary Suppliers

The industry splits into three broad branches, and the differences matter more than the shared theme.

• Growers and retailers handle the plant. Some cultivate at volume and move product wholesale to dispensaries and shops; others sell straight to the person using it. Whether a single company is allowed to do both, and on what terms, varies by state.
• Cannabis-focused biotech firms are in the drug business: research programs, therapeutic products, and in some cases the study or manufacture of cannabinoids themselves.
• Ancillary suppliers sell to the rest of the industry rather than to consumers, hydroponic equipment for the grow rooms, packaging for the finished goods. Nothing they make is itself a controlled substance, so the licensing tangle that raises risk elsewhere in the sector reaches them less directly.

That third category is why fund labels can mislead. A cannabis-themed ETF may hold a lawn-and-garden supplier alongside the growers, so a buyer expecting pure exposure to dispensaries ends up owning something with a much broader customer base.

Medical Products Made Up Around 71% of Legal Revenue in 2019

For many investors the first fork is medical versus recreational, with the cannabidiol (CBD) side of the market alongside both. In 2019, medical marijuana accounted for around 71% of revenue within the legal marijuana market, according to a report from Grandview Research, Inc. Recreational sales took a much smaller slice of the total, which follows from the short list of states that had opened non-medical markets by then.

The two markets attract different companies. On the medical side, that means firms running research programs and building products around particular diagnoses, epilepsy and cancer among them. Recreational investing points toward companies making and selling products for use outside a medical prescription, where the size of the opportunity depends heavily on how the legal environment develops.

The Fundamentals Behind a Single-Company Pick

For anyone picking individual names rather than a fund, the usual fundamentals apply:

• Earnings over time, meaning whether the figure has actually grown from report to report.
• Debt, since heavy liabilities set against equity make a company a riskier holding.
• The price-to-earnings ratio, which is what the share price says about earnings. A rich multiple usually means growth expectations are already in the price.
• Where the company sits in its industry, whether that's a real share of the market or an advantage competitors can't easily copy.
• Who runs the business, and whether anything is known about their record.
• The odds that both the company and the industry are still around in one year, five years, or ten.

Even a careful run through that list leaves room for a bad pick, and none of it guarantees a return.

Frequently Discussed Tickers, Grouped by Segment

Cannabis investments appear on the NYSE, on NASDAQ, and over the counter. These are among the more frequently discussed options:

Where Stock Picking and Fund Buying Diverge

Individual picks in this sector take more work than in most others, because a large share of the companies aren't listed on a major U.S. exchange and the least-regulated corners publish the least information. A fund moves that work rather than removing it: reading holdings and costs replaces vetting management teams, and the money ends up spread across many businesses instead of concentrated in one. Federal law is the part neither route touches. It sits underneath every ticker in the table.