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All You Need To Know About Marijuana Penny Stocks

By Ayanna Rutherford
Jul 17, 2018
A PotNetwork Special Report

Marijuana penny stocks are on fire right now as the cannabis industry continues to take off. Investors are hoping to pick the next big thing in cannabis penny stocks. Cannabis legalization efforts in the United States, as well as Canada's new law lifting marijuana prohibition, are both creating a buzz around marijuana penny stocks. Simply put, people want in on the “green rush.”

First time and seasoned cannabis stock investors are clamoring to figure out the entry point that is going to give them the best bang for their buck. The thing is, marijuana penny stocks can be an investment of equal parts risk and reward. With all of the hype surrounding penny pot stocks, it is essential that potential investors know exactly into what they are diving. Here is all you need to know about marijuana penny stocks.

What Is A Marijuana Penny Stock?

Marijuana penny stocks are usually offered by small businesses with revenues of less than $25 million as a way to raise capital for the company. Like all stocks, they give investors equity in the business.

Another interesting thing about most marijuana penny stock companies is that the company can register with the Securities and Exchange Commission using a Form SB-2. This form allows the company to leave out detailed information about the business including data and some financial information, generally leaving investors in the dark. (This is where the risk comes in but more about that in a minute)

Marijuana penny stocks are not just stocks that are valued in pennies, despite the misleading name. They are defined by the Securities and Exchange Commission as stocks that trade for less than five dollars. In fact, some well-known companies like Ford (NYSE:F), Pier 1 Imports(NYSE:PIR), Sirius XM (NASDAQ:SIRI) and Monster Energy Drink (NASDAQ:MNST) have been traded as penny stocks.

As far as pot stocks are concerned, some companies that started as penny stocks have managed to become major players in the industry. Those companies include Medical Marijuana Inc. (OTC:MJNA), Canopy Growth Corp. (NYSE:CGC)(TSX:WEED), and, Aurora Cannabis Inc. (TSX:ACB) (OTCQB:ACBFF). All of them have found their success as publicly traded companies in Canada.

[Read More: This Is The Best Marijuana Stock Investment Strategy]

How To Buy Marijuana Penny Stocks?

Like any other stock, marijuana penny stocks can be purchased through a stockbroker that includes those listed on the major exchanges as well as those listed in other places like OTC markets.

The United States stock market has been a bit cold toward pot stocks in general due to federal prohibition. Investors would be hard-pressed to find marijuana stocks traded in America, and it is even more difficult to find cannabis penny stocks in the market. Americans are turning to their neighbors in Canada to invest in marijuana-related stocks.

Canada has been a very good friend to the cannabis industry. It is estimated that there are 90 cannabis companies that are publicly traded in Canada. With all of those options, it makes sense that Americans and people around the world are looking to purchase marijuana penny stocks on the Canadian exchanges.

Two exchanges that have seen significant popularity for marijuana stocks are the Toronto Stock Exchange (TSX) and the Canadian Securities Exchange (CSE).

While the Canadian cannabis market may be intriguing for investors due to the number of marijuana stock options available, investors outside of Canada may have difficulty purchasing penny pot stocks. Investors must make sure that their broker supports trades on international markets.

Another way investors are purchasing marijuana penny stocks is through the Over-the-Counter market also known as OTC. This option is perfect for marijuana penny stocks because it requires less oversight and regulations for companies. Players in the OTC market include pink sheets and the Over-the-Counter Bulletin Board.

Pink sheets listed companies are private and have very little oversight while Over-the-Counter Bulletin Board listed companies follow more stringent rules because they are owned and operated by NASDAQ.

[Read More: How Do I Invest In The Marijuana Stock Market?]

The Risk of Marijuana Penny Stocks

Marijuana penny stocks are alluring. They speak to the very essence of "get rich quick," but investors must do their homework before purchasing these stocks because they could end up being a complete bust.

The first concern about marijuana penny stocks is that most use Form SB-2 which requires limited information about the company. Investors never can get a clear picture of the data and financials of the company leaving them vulnerable to false claims and bad information.

Part of the misleading information comes from the fact there are marijuana penny stocks that serve as merely shell companies whose success hinders on their traders and nothing more. So for example, there could be hype one day about a cannabis penny stock that sends the value up and tomorrow the hype dies down and the stock tanks.

Another big issue with marijuana penny stocks is that they can be a challenge to liquidate, especially on a bad day. An investor wanting to sell could have difficulty finding someone to purchase their shares.

The Reward From Marijuana Penny Stocks

It is not all doom and gloom with penny pot stocks. If an investor finds the right company, they can get a major financial reward.

The really cool thing about pot penny stocks is that they allow investors that do not have a ton of money to get in the game in a more significant way. An investment of $1000 in an established company may only net an investor 50 shares, but a marijuana penny stock can yield thousands of shares in a company.

To reap those major rewards, investors need to be well informed. It is important for investors to find and stick with companies who offer good financial information into the company’s operations.

It is also important to understand the marijuana penny stocks trading volume to help the investor predict the liquidity of the stock.

Finally, like any investment investors have to rely on the old Kenny Rogers saying and “know when hold ‘em and know when to fold ‘em.” Simply put, investors need to know their stock to determine the best time to sell and move on.

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