5 Things For New Investors To Know Before Investing In Marijuana Stocks

The cannabis industry's excitement is building as the California takes steps towards establishing its legal recreational market. This week Los Angeles voters approved Measure M to create regulations for adult-use marijuana, thus setting up the city to steal the title of marijuana capital from Denver.

This energy is bringing a whole new crop of investors into the pot stock market, who may not be aware of the past hiccups in this market. When Colorado legalized adult-use marijuana, pot stocks shot up. It was called the Colorado effect. Shell companies slapped the word marijuana or cannabis or green in the title and it was off to the races. Stocks like Growlife, Inc. had $8 million in revenue, but a market cap of $850 million. The stock traded at over 50 cents in 2014 before trading was suspended due to questions regarding information accuracy. It was recently listed as having a $16 million market cap and the stock trades at one cent.

One of the problems with marijuana stocks is that they trade in lockstep with each other. If White House press secretary Sean Spicer makes comments deemed as negative to the industry, the whole group of stocks drops. Many of these stocks do not trade on their own merits but swing with the news. That said, the market is blooming with new entrepreneurs as large corporations reject the industry as too risky. There is enthusiasm and desire to be a part of this new movement. However, new marijuana investors should keep these five things in mind when they consider putting their hard-earned money in this speculative field.

1. Read the filings.

New investors can find a companies stock filings on the Securities Exchange Commission site or any exchange sites. Basic information can also be found on both Yahoo and Google finance pages. Barry Clark, Chief Executive Officer at FlowerKist, says to check revenue figures and make sure there is some money coming in. During the Colorado effect days, many pot stocks traded on simply an idea or a company with the word cannabis in it and had no real business to back up their image.

2. Pump and dump.

Some traders buy stocks and then publicize something positive written about the company in order to drive up the stock price. Unsuspecting investors are unaware that these traders will sell their shares and reap the profits. Clark warned investors at the California Cannabis Business Expo to do their homework on the stocks that interest them. “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. Clark also cautioned investors about a Facebook page called Fabulous Penny Stocks. “They are actively involved in promoting stocks,” he warned.