Investments all have some degree of risk associated with them. In general, the higher an investment’s potential return is, the higher the risk is as well. There are no guarantees that you actually will receive a higher return when you accept more risk. Keep reading this article for more information on the risk-return relationship.
Whenever you make an investment in the cannabis industry, it exposes you to various kinds of risk that may affect your potential returns. The following are some of the common risks:
Success is not guaranteed
Despite the fact that companies within the cannabis sector have been enjoying rapid growth, there is still no guarantee that these businesses are profitable now or will be at some point in the future. Numerous cannabis companies have hedged their success on future sales and distribution of their products, despite the fact that the numerous regulations and rules surrounding its sale and distribution are still being established.
Some of the first cannabis companies did not succeed, with some of them frequently failing to provide adequate disclosure to investors regarding the barriers to entering the cannabis industry (like the licenses required for growing cannabis (as well as other work that was needed in order to build a profitable business). Although Canadian securities regulators are addressing these disclosure requirements, there are still risks that remain for investing in the emerging cannabis industry. Like with any type of investment, there are no guarantees that investing in the cannabis industry will offer any income or return.
The regulators and governments in numerous jurisdictions that are currently considering new cannabis laws haven’t fully established the framework for where and how cannabis products may be sold. For instance, there might be restrictions when it comes to the stores that are allowed to sell cannabis, along with the rules on advertising and branding that may affect the ability of the customer to find and buy products. Those types of challenges may affect the ability of a company to sell its products and earn profits, and that in turn may reduce how much your investment in a company is worth.
As the cannabis industry continues to grow and regulations keeps evolving, new companies will continue entering the industry and competing with current cannabis businesses. This increased competition might force a company that you are invested in to make adjustments to its business model, change its product prices, or make other types of changes to remain competitive. That might affect your investment’s value.
Cannabis corporations are required to follow all of the regulations and law of the jurisdictions where they operate, which vary from one country to the next. If laws change, then the company might be required to make adjustments to its operations in order to stay in compliance with the laws or risk legal action being taken against them. That could result in the business ending in some cases.
Some states in the U.S. have authorize the use and sale of cannabis. However, under federal law it is still illegal. U.S. authorities could decide to enforce federal law any time they choose, which puts any company in any U.S. state that is engaged in cannabis-related activities at risk of having their assets seized and being prosecuted.
Investing in companies that do business in places where either the law is unclear about cannabis use or prohibits it put your hard-earned money at risk. You could end up losing your entire investment if legal action gets taken against any company that you have invested in.
Although regulations and laws around the use and sales in Canada are constantly changing, there are rules in place that help to guide how cannabis companies operate. If a company doesn’t comply with the rules, legal action could be taken against it which could result in you losing your investment.
Taxation and Pricing
Government-mandated taxation and pricing on cannabis products also might pose a risk to a cannabis company succeeding. In order to attract customers, cannabis products, particularly those for recreational use, need to be priced under their black-market value. If cannabis products are priced too high by the government, or if prices on products are undercut by black market dealers compared to the products that are available in stores, then the companies that grow and sell the products might not be able to sell a sufficient number of products in order to earn a profit.
Inflated share prices
Chances for investing in existing in new cannabis companies or already established ones that are expanding into the cannabis industry are generating a lot of interest among investors who are wanting to get into a new trend that is expected to enjoy fast growth. However, those investments may be highly speculative, with the cost of investing in a cannabis company based on its expected future success instead of its current performance.
Companies in some cases have merely announced their intention to create a cannabis business and enjoy an immediate increase in their marijuana stocks price, without even having a viable business established. Investors who purchase shares in those companies are at risk for paying prices on investments that are inflated and that might never see an increase in value.