The cannabis industry has grown exponentially over the past few years as a number of jurisdictions, including Canada, Uruguay, and several U.S. states have explored new regulations around the sale and consumption of the product. Consequently, a number of companies and investors have expressed interest in venturing into the market to capitalize on the potential for considerable future growth.
Like any other investment, entering the cannabis market comes with some amount of risk that can affect your potential return. In this article, we discuss some of the most common risks of investing in the cannabis industry.
- Government Regulation
Governments that are considering new cannabis regulations are yet to establish a legal framework for controlling the production, distribution, and sale of cannabis across their jurisdictions. For example, there may be rules about branding and advertising that could affect the ability of consumers to find and buy the product. These restrictions on retailers can affect their ability to make a profit, reducing the value of investment in the company.
- Businesses in The Cannabis Industry
The growth of the cannabis sector has created opportunities for different companies to develop products, services, and technologies beyond the cultivation and sale of the product itself. Businesses that operate under the cannabis sector have made it possible for investors to invest in a company without having to grow or sell cannabis products directly. Examples of businesses operating within the cannabis market include industrial hemp, organic farms, biotechnology, consumption devices, and agriculture technology to name a few. With a large number of companies operating in the cannabis sector, it is important that investors do their research and invest in a company that promises high returns with low risk.
- High Operating Costs
The cost of operating a commercial cannabis company can be considerable as it requires a lot of capital, specialized and large-scale equipment and huge amounts of electricity. Construction costs can also increase a business’s overhead and as they scale up to meet demand, the cost of building new facilities may undercut profit.
To lower production costs and optimize profits, companies may consider using advanced and sophisticated horticultural equipment. Trimleaf through their online store, www.trimleaf.com, sell a variety of equipment that companies may need through the cultivation process. The company’s agricultural machinery are reasonably priced equipment and are from trusted brands. Additionally, it also offers free shipping within the contiguous U.S.
- Pricing and Taxation
Government pricing and taxation policies on cannabis can also pose a threat to the success of cannabis companies. Cannabis products need to be priced lower than the value of black-market product to attract customers. If government-mandated pricing is too high or if black market sellers lower their prices, companies selling marijuana may not be able to sell enough cannabis to make a profit.
- Inflated Share Prices
Another risk that cannabis companies face is inflated share prices. While new and existing companies are venturing in the new cannabis sector, the market is highly speculative since the cost of investment in a company is determined by the expectation of its success in the future rather than its current performance.
Investors need to understand the cannabis market, how to make a profit and related risks. As with any other new market, there’s no guarantee that investing in a company in the cannabis sector will result in profits.