How to Invest in Pot: Stocks, ETFs, & Ancillary Firms
Explore diverse avenues for investing in the growing cannabis market, from direct stocks to funds and supporting businesses.
The cannabis industry is a dynamic sector attracting investor interest. Despite a complex legal history, significant growth has occurred as more states legalize cannabis for medical and recreational use. This expansion has opened diverse investment avenues, from direct participation in cannabis companies to indirect exposure through supporting businesses.
Investing in Publicly Traded Cannabis Companies
Investing directly in publicly traded cannabis companies involves purchasing shares of businesses engaged in cultivation, processing, distribution, or retail sale. These “plant-touching” entities operate within a legal framework where cannabis remains a Schedule I controlled substance under federal law, despite state-level legalization. This federal prohibition creates challenges, including limited access to traditional banking services and the application of Internal Revenue Code Section 280E.
IRC Section 280E prohibits businesses trafficking in Schedule I or II controlled substances from deducting ordinary and necessary business expenses. This means cannabis companies often pay federal taxes on gross income rather than net income, significantly increasing their effective tax rate. Due to federal illegality, many U.S.-based cannabis companies cannot list on major U.S. stock exchanges like the NYSE or NASDAQ. Instead, they often list on Canadian exchanges, such as the Canadian Securities Exchange (CSE), or trade on over-the-counter (OTC) markets in the U.S.
To research these companies, utilize financial news sources, investment platforms, and company filings. Investors should examine financial statements, management teams, market share, and compliance with state-specific regulations. Understanding the exchange where a company is listed is important, as OTC markets might have less liquidity and transparency. The U.S. cannabis market was estimated at $38.50 billion in 2024 and is projected to reach $76.39 billion by 2030.
Investing Through Pooled Funds
Pooled investment vehicles, such as exchange-traded funds (ETFs) or mutual funds, offer another way to gain cannabis industry exposure. These funds aggregate capital from multiple investors to purchase a diversified portfolio of securities within the cannabis sector. Investing in an ETF or mutual fund offers diversification benefits, spreading investment across numerous companies and reducing single-stock risk.
Cannabis-focused ETFs and mutual funds hold shares of various industry companies, including cultivators, processors, distributors, retailers, and pharmaceutical firms engaged in cannabis research. Holdings and strategies vary by fund, with some focusing broadly and others targeting niche areas. Fund prospectuses provide detailed information on their investment objectives, strategies, and company types.
Investors can research these funds using online brokerage platforms, financial news websites, and ETF screeners. Key factors to consider include expense ratio and underlying holdings to align with investment goals. While many cannabis ETFs trade on Canadian exchanges, some are available on U.S. exchanges, offering accessible options for domestic investors.
Considering Ancillary Businesses
Ancillary businesses form a distinct investment category within the cannabis ecosystem. These firms provide essential products or services to the industry without directly “touching the plant.” They are often less exposed to the direct legal and regulatory complexities faced by plant-touching cannabis businesses. Their revenue streams support the broader cannabis market, potentially offering a more stable investment option.
Examples include providers of hydroponics equipment, specialized lighting, packaging solutions, and software for dispensary management or seed-to-sale tracking. Other services include security firms, real estate companies specializing in cultivation facilities, and marketing agencies tailored to the cannabis sector. These businesses can benefit from industry growth regardless of specific product sales fluctuations.
Identifying ancillary businesses involves looking beyond direct cannabis operators to companies serving the sector’s agricultural, retail, technology, or logistics needs. Researching these companies may involve traditional stock analysis for publicly traded firms or investigating private companies. Some ancillary businesses may not be exclusively cannabis-focused, diversifying their revenue across multiple industries and further mitigating risk.
Executing Your Cannabis Investments
Executing cannabis investments requires opening and funding a brokerage account. Selecting a suitable firm involves considering fees, available investment options, and platform usability. Many online brokers offer commission-free trading for U.S.-listed stocks and ETFs, though fees may apply for options contracts or broker-assisted trades.
Opening an investment account typically involves an online application. Required documentation includes personal information like your full legal name, date of birth, Social Security number, and current address. Brokerage firms also request employment status, annual income, and estimated net worth to assess suitability. A government-issued photo ID, such as a driver’s license or passport, is necessary for identity verification.
Once approved, fund the account through electronic bank transfers (ACH), wire transfers, or mailing a check. ACH transfers are common for smaller amounts and typically clear within a few business days. After funding, investors can place trades for their chosen stocks or fund shares through the brokerage platform.
When placing a trade, investors typically choose between a market order and a limit order. A market order instructs the broker to buy or sell immediately at the best available current price, prioritizing execution speed. A limit order specifies a maximum price for a buy order or a minimum price for a sell order, guaranteeing a specific price but not necessarily execution. Understanding these order types helps manage price risk. Investors can monitor their portfolio and access statements through the brokerage’s online portal or mobile application.