Investing in Cannabis Stocks
There is a lot of hype surrounding cannabis and medical marijuana stocks right now. An industry projected to be worth $20 billion dollars is taking shape and the time to get in is now. It is difficult for those of us involved in the industry to not see the sense in these claims. It does feel as though we are on the cusp of something momentous for the industry. However, when there is hype, there are those that will look to use investor enthusiasm to enrich themselves. These are dangerous times. Many of the cannabis and medical marijuana stocks investors can currently purchase have arrived via the over-the-counter markets, also known as OTC markets.
The general public is familiar with the acronyms of stock markets like NYSE (New York Stock Exchange), and Nasdaq (National Association of Securities Dealers Automated Quotations). These are national, regulated markets and exchanges. You can visit them at Wall Street. They are the big boys, the cathedrals of commerce, hallowed turf where serious business is done. They are places where the onus of investor vigilance is shared by the investor and the market. The market’s value is connected to an investor’s confidence that what she’s buying is worth the money she’s handing over, so the large markets have an active interest in trading only legitimate companies on their market to maintain investor confidence.
By contrast, few often hear of the OTC market. The over-the-counter market is decentralized. It has no physical location you can visit. It essentially functions like a bookie would at a horse track: dealers publish prices they will purchase or sell a security or currency at. However, once in conversation with your dealer the actual purchase or sell price doesn’t need be disclosed to the market. Compared with well-known markets, the OTC market is less regulated and transparent. When DOPE asked financial analysts at Nanalyze to comment on the OTC Market they said, “Remember when someone would tell you he could get good dank green buds for $50 a bag and then the guy would show up with some Mexican brick weed instead? Investing in over-the-counter stocks is kind of like that.”
Cannabis Companies Rejected
The OTC market, for now, is important to cannabis investors because established markets are finding reasons to exclude cannabis companies, even those that don’t, “touch the plant” as the saying goes. Denver-based social startup MassRoots was the first company to have their trading application rejected by Nasdaq who, “determined that listing the company could have been seen as aiding the distribution of an illegal substance,” MassRoots told CNN. Cannabis investments cover a range of fields, companies operating in pharmaceutical and real estate industries are already seeing some success in listing on major markets, but it seems that for companies that are directly involved in growing and selling cannabis, their market future is less certain.
What Goes on at OTC
Should investors be wary of this little-known market? Well, yes. Over-the-counter markets are the playground of pump and dump stocks. This is a phenomena where traders hoping to ride off into the sunset with your hard earned cash relentlessly promote a stock by promising a huge upside, the pump, and then once the stock is suitably inflated they sell, the dump, leaving unknowing investors holding onto worthless stock. This tactic is particularly effective in an over-hyped market, for example, the currently emerging cannabis market. “The majority of OTC companies are scams. That’s just how it happens to be in the investing world,” according to Nanalyze. The majority of the major financial analysts are still very skeptical of the emerging cannabis market. But that isn’t to say there are no good investments, it just takes an astute investor armed with the right information to find well managed companies with potential.
In an effort to help investors navigate their offerings, OTC markets list companies on a three–tiered system where the level of information provided to the market determines where the company is listed. OTCQX is considered the “Best Market,” OTCQB is named the “Venture Market,” and OTCPink is considered the “Open Market.” That OTC’s “Best Market” is color coded green should be reassuring to cannabis investors.
The examples are few, but companies can make the transition from OTC to large markets. Given the barrier of working in a federally illegal industry, it is possible that companies hamstrung by regulation will succeed if barriers are lifted. Nearly all OTC companies state an aim to up-list to a larger market, that so few do is evidence of the empty claims companies are able to make. It is important to verify your research using multiple sources, including information gathered from the company you are looking to invest your money in, after all, you’re the one most affected.
Also published on Medium.