The legal cannabis market is projected to be worth over $73 billion by the year 2027, with the value more than doubling between now and 2025 alone. And as cannabis is legalized across the nation, entrepreneurs and investors alike have flocked to potential profits found in cannabis stock and related business opportunities.

🤔 Understanding cannabis stocks

Cannabis stocks are issued by companies that participate in any cannabis-related ventures, be it directly or indirectly. But as a trendy, budding industry with lots of press and growth potential, it can be difficult to tell the legitimate or worthwhile stocks from the scams and the duds. So how do you tell the haves from the have-nots in a new industry plagued by questions of legality?

You can start by considering the numerous – but not insurmountable – challenges presented by the industry.

One particular concern with cannabis stocks is the fact that you can’t rely on decades of financial reports, technical indicators, or peer performance. Nor can you look to stocks with big balance sheets, as even companies that have grown exponentially are not guaranteed future performance.

In fact, you might look at cannabis stocks as startups with unusually bloated balance sheets and cash flows. And while larger startups are more likely to have the funds for investing in new grow hubs and dispensaries, federal law also prohibits federally regulated banks from lending to cannabis companies, thereby limiting outside financing opportunities.

Other challenges include limited tax deductions and the presence of limited licensing opportunities in some states, which leads to a first-come-first-serve model in select markets – and a free market free-for-all in others.

Lastly, it’s essential to recognize that federal legalization will allow cannabis companies to grow and spread into new markets and across state lines. Over time, this will force firms to change their business models – likely flooding some markets and leaving others woefully unsaturated.

All of these challenges mean that cannabis is likely to remain a volatile industry for the foreseeable future. And with long-term volatility comes high risks – and the potential for high regards for aggressive investors willing to take a chance.

What this means for you

Once you’ve decided that investing in cannabis stocks is for you, the next step is to know where to start.

One place is with individual stocks in one of the three major marijuana industries: growers and retailers, biotech companies, and ancillary firms.

For instance, if you want to get directly involved with marijuana production, you could seek out “blue chip” cannabis stocks: large, somewhat stabilized firms with healthy bottom lines, large cash infusions into growth potential, and plenty of growth under their belt.

Companies that have an affiliation with the industry and established revenues in other avenues are another potential investment. For example, a number of manufacturers and retailers dealing in hydroponics equipment, fertilizer, and even “head shop” products have proven profitable in recent years.

And of course, you can invest in pharmaceutical companies researching cannabis products. One such example is GW Pharmaceuticals, the only company with an FDA-approved, cannabis-based drug on the market.