As cannabis stocks start to show solid underlying fundamentals and the market in general braces for a recovery from the recession of 2020, many investors are eyeing cannabis stocks as a potential BUY with potentially upside potential this year. The problem is that many investors are new to the world of investing in cannabis stocks, and there isn’t a ton of analysis and guidance on them either. As a result, many investors are flying blind and testing the waters for themselves to see what works and what doesn’t when investing in cannabis. This can result in significant losses which is why we’d like to help you avoid 2 common mistakes when investing in cannabis stocks.
Because this is an unguided venture for most investors, the risks are high. The chances of making one or two rookie mistakes are even higher. According to our research, there are two main mistakes that rookie investors make when investing in cannabis. Please pay attention to make sure you don’t make them too.
Investment Mistake #1: Being Too Far Ahead of the Market
This is a common mistake that many investors make for a lot of new markets. It’s easy to get caught up in the hype and frenzy over the new investment opportunity and forget that the market doesn’t always follow the hype. Neither do the regulators.
The general attitude towards cannabis in the United States right now is a good one. There are significant bills in both Houses of Congress which offer a lot of hope for the cannabis industry. But hope is not good enough for the stock market. It would be best if you did your homework. Study the fundamentals and identify your entry point.
For example, when Canada legalized recreational cannabis in 2018, many investors rushed the market. They made many premature bets that failed because it was going to take several months for the lawmakers and regulators in all the provinces to catch up.
The markets also needed time to identify the right signals for the industry. The licensed growers were also going to need time to establish a steady supply to the markets. All this lag cost a lot of early investors a lot of money. The volatility in this industry can best be dealt with by staying live and trading on the news that has broken, not the news you expect to break.
Investment Mistake #2: Ignoring Dilution
This is a major problem for investors in cannabis stocks, specifically because of the unique liquidity problem many cannabis businesses find themselves in. Many cannabis businesses are in dire need of liquidity options because many institutional lenders won’t lend money to them.
The regulatory uncertainty makes it hard for banks and other financial institutions to offer credit options to cannabis companies because they are afraid of being penalized for it in the future. As a result, many cannabis companies regularly offer up equity or take on convertible debt as a way of becoming liquid.
This means that many investors will continue to get diluted out down as the company grows and takes on new investors. Take Aurora Cannabis (NYSE: ACB), for example, which is a good cannabis stock according to many experts in the market. Aurora Cannabis saw its shares go up from 1.35 million shares in June 2014 to over 186 million shares by the end of 2020. That a 13,000% jump in total shares outstanding.
Those are the two most common mistakes that most investors who are new to the cannabis market are making. Have you already made one of the two in this article? Is there a way around them? Take the guesswork out of cannabis stock investing with our automated trading platform. Get your free month now.
2 Common Mistakes to Avoid When Investing in Cannabis Stocks
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