Thinking of investing in the cannabis industry?
You may have heard about entrepreneurs or investors who have gotten rich from the cannabis industry. Maybe you believe, like some, that the legalization of recreational cannabis will lead to greater cannabis consumption and generate lucrative investment opportunities.
It is important to understand that the cannabis industry is in its early stages and could change considerably over the coming years. It is unclear how many companies in the industry will become profitable. Some will succeed, while others will fail.
Investing in the cannabis industry is risky
All investments involve a certain degree of riskIn the field of investment, risk is the possibility of earning a lower return than anticipated or losing all or a portion of the amounts invested. There are several types of risk that can affect the value of an investment, including credit risk, counterparty risk, currency risk, and political risk.
In insurance, risk is the likelihood that an event will take place, causing a loss. For a risk to be insurable, it must be uncertain. Furthermore, it cannot depend solely on the willingness of the insured. . As a general rule, the higher the expected returnExpected return is the gain you anticipate earning on your investment in the form of interest income, dividends, or capital gains.
The return you actually earn may differ significantly from the expected return. Generally, the higher the expected return on an investment, the higher the risk. , the higher the risk. You may not get the return you hoped for and may even lose money. What is your risk tolerance? This link will open in a new window If it is low or you are nearing retirement, cannabis company stocks may not be right for you.
Like any investment, it is impossible to guarantee that investing in the cannabis industry will generate returns that live up to your expectations.End of the warning
The cannabis-related companies that are raising capital from investors are in the business of cultivating cannabis or developing products, services and technologies to support the industry, such as lighting, ventilation and irrigation systems, product packaging and smoker’s accessories.
New players could enter the market and compete against established companies. The increased competition could result in lower profits for the company you are thinking of investing in. In addition, a black market offering lower prices to cannabis consumers could affect the profitability of legitimate cannabis companies.
As the sale of recreational cannabis is subject to restrictions and may be regulated differently from jurisdiction to jurisdiction, the growth of some companies could be slowed by their need to comply with regulations. Also, expansion in the industry could be limited by the fact that cannabis use remains illegal in many countries.
Do your homework before investing
If you want to invest in the cannabis industry, you will need to devote some time and energy to gathering information.
Unlike industries where companies have been around for a long time, the cannabis industry discloses limited financial information and has little historical data.
If you want to invest in a cannabis company, do your research:
- Find out about the cannabis industry.
- Read the prospectus or the offering memorandum, which provides information on the company, its management and business, and the risks that could affect its profitability.
- Take the time to understand the company’s business plan, how the company will generate revenue and how long it will need to reach profitability. Read the company’s annual reports, management's discussion and analysis (MD&A)Management’s Discussion and Analysis (MD&A) is a document that explains management’s point of view on the company’s financial statements, financial condition and future prospects. This report complements the financial statements, but does not form a part of them. reports, annual information formsThe annual information form is an information document that describes the company and its activities at a given time, future outlooks, the risks to which the company is exposed and any other factors that impact the company. , news releases and other corporate documents that may contain information allowing you to determine whether the company is making or losing money. Does it have cash assets? Is it carrying a lot of debt?
- In the case of a company that will cultivate, produce or package cannabis, has it obtained the licences from Health Canada and the Canada Revenue Agency?
- If the company is seeking to sell recreational cannabis, has it entered into an agreement with the Société québécoise du cannabis (SQDC) or an organization in another Canadian province that is mandated to sell cannabis to the public? Is it already capable of producing enough cannabis to meet demand?
- Will the company need to raise additional funds to build or upgrade its facilities? Will it issue other securities? If it does, the value of your investment could decrease.
- If you have an account with an investment dealer (broker)A dealer (or broker) is a professional who manages the transaction between the client and a financial institution, insurance company or stock exchange.
For example, the dealer conducts the stock exchange transaction to buy or sell on behalf of the client.
In damage insurance, a broker may offer the products of several insurers while an agent sells the products of a single insurance company. , ask his or her opinion on the company’s securities and the cannabis industry. If the securities you are buying are not traded on an exchangeAn exchange, such as a stock exchange, is a market where investors can buy and sell securities, including shares and options.
In order for a company to be listed on an exchange, it must meet certain criteria and regulations, relating to accounting practices and information for shareholders, for example. , you may have to keep them for an indefinite period of time.
If you expect to resell your securities quickly, this type of investment may not be suitable for you.