How to trade CFD cannabis stocks

The cannabis industry is fertile ground for investors, being relatively new. Legal medical and recreational consumption is gaining support globally. As such, cannabis stocks can create exciting opportunities for adventurous investors. Here’s how.

Trading cannabis stock CFDs

The industry and products

Cannabis is split mostly between recreational and medical marijuana. The industry itself is expanding quickly. Reports and research from the likes of Grand View Research suggest the worldwide cannabis industry will be worth US$73.6bn by 2027, growing at a CAGR of 18.1%.

At present, the focus is more on medical cannabis stocks, although legal personal use could gain more traction as the decade progresses. Medicinal marijuana has been legalised in many nations, including the UK, Canada, Germany, and Australia, and in 30 US states (despite being illegal on a federal level).

What cannabis stocks can I trade?

Cannabis stocks are split into three main categories:

• Growers – As the name suggests, these are the companies that grow, harvest, and wholesale distribute the plant. Legal constraints mean there are fewer companies operating in this area than others, however, Canadian companies are starting to emerge as market-leading growers as cannabis were fully legalised for recreational use there in 2018.
• Biotechs – Biotech companies concentrate more on medical marijuana development. Often, their products will be synthetic, rather than natural, but biotechs are still classed under cannabis stocks.
• Supply providers – These types of companies are concerned with the tools and materials needed to grow the plant itself. Think of products like light systems, hydroponic equipment, and soils and fertilisers.

Cannabis CFD Trading: risk vs reward

If you are thinking about taking the plunge into the world of cannabis trading, then you will need to consider its potential risks.

Firstly, despite the UN removing cannabis from its schedule of narcotics, the drug is still illegal for both medical and personal use in many countries around the world. Only Canada and Uruguay have fully legalised it.

That means, when choosing, you might want to consider UK cannabis stocks from medicinal companies, Canadian growers, and so on because they will not face the same legal hurdles as say US firms where it is still technically illegal on a federal level.

Price volatility is another aspect to take into consideration. Because of the industry’s growth potential, marijuana shares may not reflect the company’s actual profitability and individual growth. Much of the talk around cannabis is based on optimism, rather than current fundamentals.

Which asset do you want to trade?

Marijuana stocks are shares in publicly traded cannabis firms. In the past, such companies may have struggled to be listed on stock exchanges. But things have changed with the softening of attitudes towards the drug. You will now find cannabis stocks on exchanges like the NYSE, NASDAQ and Toronto Stock Exchange (TSX).

Companies identified as ones to watch in the world of cannabis include:

• Canopy Growth – An R&D focussed firm
• Tilray Corp – Tilray has just signed a merger with fellow Canadian grower Aphria to form the world’s largest cannabis company worth US$2.8bn.
• Aurora Cannabis – A producer first listed on the TSX and subsequently has been on the NYSE since October 2018.

Trading vs investing in marijuana

It’s important to learn the difference between trading and share investing. The key differences are:

• The timeframe positions are held for
• How profit is made
• Speculating on the product without ownership vs. physical share ownership

Investing

Investors buy shares outright. They hope that they will increase in price so they can be sold for a profit at a later date. That means they tend to hold onto shares for a long period of time, so they can attempt to profit from any changes in share price, and through any dividend payments they may be accorded as share owners.

Trading

Trading stocks uses derivative products like stock contracts for difference (CFDs) or spread bets. This means they take their value from the underlying market the asset is drawn from. Traders in this case do not own the shares. However, they can make a profit on the share price movement from rising or falling shares. As such, these trades take short to medium-term positions, instead of long ones.

Traders should conduct thorough research before investing even if trading seems attractive on paper, a detailed understanding of the trading tools and assets is crucial to make informed decisions. Failure to do so could lead to trading high-risk assets with little chance of returns, resulting in substantial losses.