The Hidden Risks In This Type of Stock
The interesting thing about trading for a living, is not just the constant hate I get from those too lazy to see that my rules actually work, it’s that some days there’s no great plays.
So even though I have my trading software scanning for any hot stocks, I sometimes see nothing worth my time or money…
This is when I get to go outside, adventure, swim some laps and not feel guilty missing anything truly great. I am 100% dedicated when there is a hot play — I even missed my college graduation for a trade (true story).
But this is SO much better than a normal 9-5 because not only is the money great, I also get to take off some days during the work week.
Although as an even more dedicated teacher I can’t help but stay busy working on new video lessons and sharing what I know. I just hope that when you utilize my teachings correctly, you won’t have to work as hard as me!
If you’ll recall, my last teaching subject was medical marijuana stocks. I shared with you suggestions on how to make the most intelligent trades. Now that you’ve had a bit of a breather over the weekend I have three things that you must keep in mind before you decide to dip your toes into this market…
Key Tips to Trade Medical Marijuana Stocks
1. Establish Your Budget
So how much of your account are you willing to put on the line when investing in medical marijuana?
Part of improving your chances of successful trades is having a plan in place. Part of that plan is deciding how much you’re willing to invest in a particular stock.
There’s no definitive answer here. It depends on multiple factors — the size of your account, your risk tolerance, and how good you think the setup is.
My advice: Study hard before you put any of your account on the line.
2. Research the Company You’re Considering to Invest
When considering marijuana companies to invest in, you have to do the research.
Medical marijuana stocks are hot now and offer the potential for great returns …
Then again, they don’t have a proven track record. They’re volatile, so losses could mount quickly.
How do you know if the stock you’ve chosen is a good pick? Research, research, research.
Solid fundamental and technical analysis will help you out here. Get an idea of what the company is, what they do, the buzz around them, and their earnings.
A lot of these companies are growing fast, so read up on their financials and what people are saying about them.
Then, back it up by looking at their chart and checking out the action around the stock. If it looks too good to be true, it probably is.
3. Understand the Risks of Investing in Medical Marijuana Stocks
There’s a lot of risk involved in trading medical marijuana stocks.
Legal ambiguity, lack of clear regulations, and constantly changing laws — there’s just so much uncertainty.
If you want to trade these stocks, you need to understand the risks involved, including:
Hard-to-value stocks.The valuation can be determined by comparing a stock’s price to the company’s earnings, as well as cash flow and overall revenue.
Some marijuana stocks have increased in price so fast that it’s hard to get an accurate read on the growth potential for the stock.
Also, some newer companies aren’t profitable yet or are too new to really show historical data.
That means most people are looking at growth projections rather than the cold, hard facts of history.
It can be hard to determine if a price is appropriate — especially since no one really knows what the future legal forecast holds.
Not all companies will succeed. Medical marijuana stocks are trending, and plenty of people are jumping on the bandwagon with weed-related startups. Trouble is, with such a glut of supply, the demand will eventually decrease, and some companies are bound to fail. And if you’re holding stock in one of the failing companies, you could lose big (unless you’re selling short).
Potential dilution. As the medical marijuana sector heats up, lots of companies are eying expansion.
But if they don’t have enough capital, they may issue additional shares to build up capital. The value of the existing shares will drop — now there’s a higher number of outstanding shares. Dilution is a real risk for marijuana stocks because the legal grey area prevents some companies from borrowing from banks. And they might resort to creative ways to raise cash.
Risk of commoditization. Marijuana is grown, which classifies it as agricultural. Here’s the thing: Agricultural items are considered commodities.
Commodities are a classification of securities that includes raw materials and items ranging from metals, like gold, to resources, like oil. Basically, they’re items that are inherently the same between different companies, with price being the only real point of difference.
Commoditization can lower the price point because companies must adhere to industry standards to a certain degree to maintain even demand.
This isn’t a big problem right now, because the demand for medical marijuana is very high. But as legalization continues to sweep through the states and more producers get in on the action, that could change.
The Bottom Line
Medical marijuana stocks are undoubtedly one of the hottest sectors so far in 2019.
The legal landscape for marijuana and CBD in the U.S. is changing, and plenty of stocks are making big moves.
You gotta watch out: The volatility in this market can be dangerous …
But it can also provide opportunities for traders who are willing to do the research. And it can work for traders who have the risk tolerance to handle this action-packed sector.
These stocks are kind of like the wild west, so watch yourself. Make sure you’re not gambling or getting in over your head.
Ultimately, the same principles hold true for these stocks as for any other stocks: You need to do your homework. Be sure to make a watchlist, do your research, and always cut losses quickly.
— Tim Sykes
Editor, Penny Stock Millionaires