Investing in cannabis stocks is exciting and can be very lucrative. However, given their volatility, it is important to keep these 7 tips in mind to confidently and successfully leverage this explosive sector.
1 – Create Realistic Expectations:
The legal cannabis industry is one of the most exciting investments I’ve ever been around in 17 years of trading and investing. Many cannabis stocks have delivered big returns in a short amount of time. These outsized returns have expectations running sky high for the cannabis stocks. Although I’m expecting great things from cannabis stocks, don’t get too excited about gains and don’t get too bummed about losses.
2 – Focus on the Long Run:
When analyzing an investment, sometimes I use a microscope and other times I use a telescope. For cannabis stocks, I am using my telescope. That means I am looking at this investment from 10,000 feet above. I am expecting plenty of volatility in the short run. But in the long run, I am expecting the industry and stocks to steadily move higher for many years. It’s another way of saying don’t sweat short-term volatility.
3 – You Don’t Need to be a “Trader” to Profit from Cannabis Stocks:
There is a tendency for some investors to think that making more trades equals making more profits. That is not true. In almost two decades trading and investing, I’ve found that more trading usually means less profits. My goal with cannabis stocks is to invest early in future global leaders. This is where the real fortunes are made. This is where I am looking for a “100-bagger” – a stock that doubles 100 times like Microsoft or Apple.
4 – Stay Diversified:
Picking winners and losers in the cannabis sector is not easy. Right now, there are more than 250 stocks in the global cannabis sector. From this group, some companies will grow into global leaders. Others will fail and file for bankruptcy. This is why I recommend a diversified portfolio of cannabis stocks like the one I’ve crafted for the members of CST – start a 2-week free trial. By investing in a group of cannabis stocks, you limit your exposure to one individual company struggling or failing.
5 – Don’t Wait for a Big Pullback to Invest:
Buying shares near a 52-week high can be intimidating for many investors. But you know what’s even harder? Watching your favorite stock rally to new highs month after month while “waiting for a pullback.” Don’t worry about buying the monthly or even weekly low. As an investor, your best friend is time. Buying lets time start working in your favor.
6 – Always Use Limit Orders:
Cannabis stocks have wider bid-ask spreads than larger companies such as Google and Microsoft. Those wider spreads expose investors to price risk when buying and selling shares. That’s why I recommend always using limit orders for all cannabis trades.
7 – Optimize Taxes with a Roth IRA:
Big profits have one downside. Big taxes. One of the best tax strategies for cannabis stocks is using a ROTH IRA to own these stocks. With the Roth IRA, all investment profits grow tax-free. It’s always smart to consult a tax professional to discuss your individual needs.
About the Author
Michael Vodicka is an equity analyst with more than 20 years of experience trading and investing. His research has been featured in some of the industry’s most respected publications. He has been investing and leading investors in the cannabis sector since 2013.