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What to know before investing in pot stocks

With regulations for the legal use of cannabis in various states in America now in place or in advanced stages of legislation, marijuana-based businesses are at an all-time high. In fact, according to San Francisco-based cannabis research firm ArcView Market Research, cannabis revenues are expected to reach $24.5 billion by 2021.

As more markets open to legal recreational marijuana in the United States, investors are also cashing in on the crop through the so-called “pot stocks.” But what are the things that people, particularly new investors, need to know before they invest their hard-earned cash in marijuana stocks?

Here is a list of some investment points from Debra Borchardt, co-founder, CEO and Editor-in-Chief of GreenMarketReport, a financial news site for the cannabis industry. These tips, via Forbes, will bring any new investor a long way when investing in pot stocks:

  1. Look into the filings necessary to know what the company is really doing

A simple online research on the Securities and Exchange Commission would give interested pot stock investors the basic information of the company. SEC documents would also show whether the company is making money.

According to Borchardt, the so-called Colorado effect makes for a perfect example of why investors should review financial statements.

When the state of Colorado legalized marijuana, pot stocks shot up as investors raced to get a share of the temporary bull run. Publicly listed firms like Growlife Inc. has a market cap of $850 million but only has $8 million in revenue. But questions on the accuracy of the information provided by the company resulted in the suspension of trading and the drop of its share price from $0.50 in 2014 to just $0.10 with a market cap of $18 million.

  1. Don’t just join the bandwagon

As excitement builds up around legal marijuana market, cannabis stocks are expected to follow. However, it is important to remember not to believe everything that is written or published about a certain green stock.

Just like in a regular stock market, investors have to learn the fundamentals of a business to know if the company is making money or has a sound business foundation. And just like in regular stock markets, pot stocks are also subject to possible manipulation by some traders.

These unscrupulous individuals can make money through a “pump and dump” scheme, wherein they make positive comments about a cannabis stock to hook unsuspecting newbies and drive the demand for the stocks before selling their shares. This process allows them to reap massive profits but leaves bandwagoners with nothing.

  1. Know the people behind the company

It helps to know that your hard-earned money is being handled by people who know what they are doing. In regular stock markets, they are required by law to provide the list of company officials.

Knowing the management team behind a marijuana company would also give you an idea of what to expect, whether you’re a day trader or a person looking for a long-term investment for your retirement.

  1. Follow the money trail

Pot companies vary and so are their publicly-listed shares. It is important for new investors to know which cannabis-based business are actually making profits now and what can be considered as long-term investments.

According to the FreshToast, marijuana pharmaceutical businesses so far have been most successful with over $1.5 billion worth of investments. This is followed by producers or growers with $645 million and consumer or retail products with $302 million. Hedging is also a good opportunity for those who want a more speculative environment for their money. Compared to day-trading, hedging has higher returns on your investment.

  1. Know the industry leaders

Borchardt warns against cannabis companies that are pictured as always in a good run, say every day. Even the best companies have weak aspects. Only a few in the cannabis industry are big earners. Of these, it is wise to eliminate the ones that are moving at a steady pace and are not making further gains. This deductive process may leave you with PotNetwork Holdings, Inc. (OTCMKTS:POTN), a company which has been seeing an exponential jump in its financial performance, year after year.

In fact, the company recently announced that revenue in the January-to-March period this year surged by $6.3 million or 283 percent from last year’s first quarter. The figures are offering PotNetwork a basis to believe that it “is well on track” to exceed its $14.5 million profit generated last year.

The company offers cannabidiol (CBD) products through its subsidiary, Diamond CBD, Inc. The company is known for its production of premium CBD products that range from oils, tinctures, edibles, pet products, vaporizers, and creams, among others.

The company is surpassing standards as it adopts a supercritical CO2 extraction process that allows its products to have the purest and highest-quality CBD compared to other CBD manufactures in the U.S. today.

The cannabis industry remains a high-risk, high-reward investment. Following these tips will help investors find the best pot stocks to bet on, such as the ones that continue to innovate and improve their products and services.

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