Reasons to Hold Off on Marijuana Stock Investments

Over the last few years, the legal cannabis landscape has changed dramatically. More states across the U.S. have moved to legalize recreational and medicinal marijuana. Canada legalized recreational marijuana use on Jun. 20, 2018 and Mexico seems to be following in step. On Nov. 8, 2018, Mexico's incoming government submitted a bill to create a medical marijuana industry and allow for recreational use of the drug. With signs pointing to eventual U.S. legalization, North America is poised to become a global leader in the emerging marijuana industry. That industry may still be budding, but some estimates already value it at over $150 billion per year. Much of the growth in the cannabis industry can be credited to the influx of companies involved in the production, distribution, and study of legal cannabis.

Almost overnight, investors have the opportunity to place their assets in a number of legal marijuana businesses. And yet, despite all of the hype, there are still reasons for investors to be cautious moving forward. In this article, we break down four questions that you should ask before investing in the legal cannabis industry.

Recreational marijuana is legal in 10 states in the U.S., while 33 more have passed bills to allow for regulated medicinal use. States on the west coast may have led the charge, but there are now regions throughout the country where individuals can grow and purchase pot legally. Nonetheless, the prospect of a national effort to legalize marijuana remains elusive, even in spite of the fact that more and more individual states are moving in that direction. Investors should keep in mind that federal legalization is by no means guaranteed, and that, in the meantime, companies face highly disparate sets of regulations depending upon where in the country they operate.

A major point of contention in the debate over legalization of marijuana is the question of taxes. Taxing marijuana sales stands to provide a tremendous economic boon for states in which pot is legal. However, taxes mean an increase in the price of marijuana for the customer. If taxes are too high, or if the balance is not maintained carefully, the demand for marijuana could easily drop off. This would mean lower sales and, for investors in marijuana companies, potential losses.

Many of today's leading marijuana companies are enjoying the benefits of high company valuations. Although that might be enough to convince some investors to get in the game, it's important to keep in mind that company valuations may be largely based on market hype. Because the marijuana industry is relatively new and largely untested, it is unclear whether today's market valuations will settle down around where they're at now. If investors end up overestimating the potential of the legal cannabis sphere, it's likely that those valuations will eventually drop.

Investors looking to take part in the legal cannabis industry should keep in mind that the field is currently quite crowded. Hundreds of companies around the world are vying for dominance in an industry that is still young and developing. In all likelihood, only a few of these companies will ever grow into major market players. Many others will likely maintain small operations or even shutter under market pressure.

Some stocks are safer bets than others, but it's incredibly difficult for the everyday investor to predict which companies will come out on top and bottom. Marijuana stocks are incredibly volatile right now, and that means every investment should be taken with extreme caution. Although there are reasons to hesitate when it comes to investing in the legal cannabis industry, many investors also see tremendous opportunity. The question that remains to be seen is whether the potential rewards outweigh the risks involved. Unfortunately, that question can only be answered in retrospect.