Cannabis

Cannabis trading offers an attractive opportunity for some investors, given its comparably new status in the agricultural industry. As more cannabis products become legalised for medicinal and recreational purposes, traders are seeking out popular investments via stocks, ETFs and CFDs. This guide will explain the cannabis trading market, from investing vehicles to price drivers. Our UK team have also reviewed and ranked the top cannabis brokers:

How The Legal Cannabis Industry Works

In recent years, licensed companies have been permitted to operate in the cannabis industry. Whilst recreational consumption of cannabis is illegal in many jurisdictions, medicinal usage is widely permitted. For example, in 2018, the UK government allowed cannabis to be used for medical reasons if prescribed by an NHS or private doctor.

In addition, rules around recreational usage have been relaxed in other jurisdictions, including full legalisation in Canada as well as many US states, such as Colorado. As a result, the number of listed companies involved in the cannabis industry has increased. For example, Kanabo Group and Oxford Cannabinoid Technologies are both now registered on the London Stock Exchange.

In the cannabis trading market, companies operate in three main areas: production, retail and biomedical.

• Production & processing: Companies that grow and cultivate cannabis to be shipped and sold as consumer products, such as oils and edibles. One example is Aurora Cannabis, which has been growing cannabis since 2013. A more diversified company is Associated British Foods, which has dedicated cannabis greenhouses in Norfolk, UK, alongside other commodities such as sugar.
• Retail: Following the legalisation of cannabis for recreational consumption, many dispensaries were created with the sole purpose of selling cannabis and related products such as CBD oil. The Chill Brands Group is a prime example of a CBD-product seller.
• Biomedical & research: Companies that investigate the potential medical benefits of using cannabis and develop pharmaceuticals derived from cannabis. For example, cannabis has been used to treat conditions such as epilepsy, migraines, Parkinson’s disease and insomnia. Cellular Goods is a biomedical cannabis company which creates skincare products used to treat pain and reduce inflammation.

Overall, the industry outlook is arguably looking positive. The Global Cannabis Report by Prohibition Partners estimates that the global CBD and cannabis trade could amount to over $101 billion by 2026. With that said, factors such as government regulations and public opinions can heavily impact the market.

Cannabis Price

How To Invest In Cannabis

You cannot trade directly on the price of cannabis as you can with other agricultural commodities such as sugar or soybeans. As a result, the available vehicles for online trading cannabis include shares, indices, exchange-traded funds and share baskets.

• Stocks: You can trade stocks of publicly listed cannabis companies, either directly or via derivatives such as CFDs or futures and options. Share dealing involves buying and owning stocks outright. For example, IG Index is a popular broker offering shares in Cronos Group, Canopy Growth Corporation and more. Derivatives allow you to speculate on bullish and bearish trends.
• Indices: Trade on cannabis-based indices such as the Cannabis Index, which provides a benchmark for the wider cannabis industry. The Cannabis Index derives its value from a basket of 20 listed companies involved in the cannabis business and is available at brokers such as IG Index, City Index and AvaTrade.
• ETFs & share baskets: Exchange-traded funds (ETFs) are diversified products that are traded on exchanges and available at leading brokers. One common example is the Cannabis share basket tradable through CMC Markets, which contains 7 licensed medicinal cannabis producers.

5 Popular Cannabis Stocks

At the time of writing, some of the biggest firms in the global cannabis industry include:

1. Innovative Industrial (IIPR): Approximate market cap $1.94 billion
2. Curaleaf (CURLF): Approximate market cap $1.88 billion
3. Green Thumb Industries (GTII): Approximate market cap $1.87 billion
4. Tilray (TKRY): Approximate market cap $1.68 billion
5. Verano Holdings (VRNOF): Approximate market cap $1.10 billion

What Influences The Price Of Cannabis?

Before you start trading cannabis, you should be aware of certain factors that could impact the performance of your portfolio:

• Regulation: Changes to legislation or trade can affect the entire market. For example, in October 2022 President Biden in the USA pardoned those convicted of possession of cannabis as well as calling for a federal legalisation review into cannabis. Both acts resulted in an immediate boost in the value of many cannabis-based stocks, such as the AdvisorShares Pure US Cannabis ETF.
• Consumption & demand: Consumer trends and sentiment can impact the value of cannabis stocks. For instance, a decline in cannabis demand can lower dispensary revenue and negatively impact a company’s valuation, which may affect its stock price. Between 2018 and 2022, the percentage of recreational users in Canada grew from 22% of the population to 27%, representing a generally positive trend.
• Expansion into new regions: As new countries legalise medicinal and recreational cannabis, new investment opportunities are created. In 2018, Canada legalised recreational cannabis and stocks of related firms in the country saw a boost in valuation. For example, the stock price of Tilray grew by almost 6 times between August and October.
• Company fundamentals: Fundamental analysis is a key element in trading cannabis shares. This includes looking at company performance, news and announcements, industry forecasts and analysing the competitive landscape. Several cannabis companies also operate in other areas, such as growing other soft commodities, which could have an indirect impact on stocks.

Getting Started

Choose A Broker

To find the best cannabis broker for your requirements, consider the following factors:

• Regulation: Our team recommends choosing a broker that holds a valid license with the Financial Conduct Authority, the financial regulatory body in the UK. A broker with FCA regulation ensures that your funds are better protected through various measures. For example, if the broker were to default, you could be entitled to claim up to £85,000 in compensation.
• Fees & charges: Determine the fee structure that is best for your cannabis investing style. This can depend on the instrument you are trading, for example, CFDs via CMC Markets come with a 0.10% commission, which is competitive. Other fees you need to be aware of include deposit and withdrawal charges, overnight swap fees and any inactivity charges.
• Trading platform: Find a broker with a reliable and powerful trading platform which supports technical analysis. Look out for a good range of indicators, patterns and charting options. The best cannabis trading platforms also come with economic calendars and market insights, plus analysis and forecasts from experts or third parties. Examples of some of the best platforms for cannabis stock analysis include MetaTrader 4 and cTrader.
• Payment Methods: Compare the available payment methods that you can use to make deposits into your brokerage account. The top cannabis brokers typically support wire transfers and bank cards, as well as some e-wallets like PayPal or Neteller. E-wallet deposits are typically processed instantly, making them attractive for short-term traders.

Learn How To Trade Cannabis

A key aspect of trading cannabis is studying market trends and stock movements, using news and analysis tools. Leading cannabis brokers will offer access to real-time news feeds and expert industry summaries. In addition, consider using third-party analysis tools such as TradingView to keep on top of stock price movements.

For example, the image below shows a TradingView forecast for the cannabis company Aurora Cannabis Inc.

Aurora Cannabis Inc, TradingView

You should also establish a cannabis trading strategy, which can be used to determine the optimum market conditions for opening or closing a position. A popular example is trend following, which aims to determine whether an asset is undervalued or overvalued and therefore is likely to increase or decrease in price. To do this, you could use technical indicators such as the Stochastic Oscillator.

Finally, we recommend practicing your strategies in a demo account, so that you can familiarise yourself with the platform and practice using technical analysis tools. Most top cannabis brokers, such as IG Index, offer free demo accounts with virtual funds, so you can test trading setups risk-free.

Risk Management

As with all trading, profits are not guaranteed, and cannabis traders can quickly lose money. Implementing a robust risk management system can add a layer of protection to your capital.

For example, ‘take profit’ and ‘stop loss’ orders automatically close your positions under certain market conditions. A take profit secures profit to help prevent you from losing out on a winning position. A stop loss will exit a position once a certain losing margin has been reached to prevent losses from spiralling.

Advantages Of Trading Cannabis

• Cannabis trading offers exposure to a developing industry, where investors could take advantage of short-term volatility
• As cultural views on cannabis shift, more regions may change regulations on cannabis, providing new investment opportunities
• You can diversify your portfolio using CFDs, ETFs, indices or by trading shares in large or emerging cannabis companies

Disadvantages Of Trading Cannabis

• Many cannabis firms are still relatively new, with a short track record, which can make them risky investments
• It is hard to predict future market trends for cannabis since sentiment and government regulations have a large impact
• You cannot trade directly on the value of cannabis. Instead, you often have to trade on companies in the cannabis industry

Bottom Line

The potential for the rapid growth of the industry makes online cannabis trading an exciting investment opportunity. However, as cannabis is not yet tradable as a commodity, you are restricted to trading on cannabis-based companies via stocks and derivatives. In addition, the market is still unpredictable and risky due to jurisdictional laws and changing public sentiment.

Make sure you understand the market well and choose a reputable, regulated cannabis broker which offers all the tools needed.

FAQ

Article Sources

European Cannabis Report

IG Cannabis Index

Medical Marijuana UK