The medical and recreational marijuana industry is growing by leaps and bounds.
Investors are amped up and ready to get in on the ground floor of the businesses that will become the pot giants of the future. Finding that whale while it’s still at the price of a minnow is a different matter entirely.
Today we’ll give you a basic introduction on how to pick out great pot stocks that will be profitable for years to come.
Buy What You Know
If you want to know how to profit from pot stocks you should absolutely focus on things you understand. If you can’t easily explain what a company does and why it’s a valuable service you have no business investing in it.
With marijuana stocks this really comes down to looking at potential companies and figuring out their business model. An Uber for weed may seem like a really good idea, but not if they haven’t fully figured out the legality of it.
If you don’t have a firm understanding of what a company actually does you is in no position to decide whether they’re doing it well or profitably.
Look at Financial Indicators
Pot stocks, like any investment, come down to the numbers more than anything else. You need to be able to read the financial indicators that show generally how a company is doing.
Revenue growth, known as the top line to investors, simply refers to how quickly a company is growing their income. This is a great starting point when deciding on investment because a company that isn’t growing their revenue generally won’t go up in value.
This isn’t always true, especially with early-stage startups, but it’s a great place to start looking.
The Bottom Line
In life it really does come down to the bottom line. This tells you whether a company is actually profitable. It compares their income to their expenses and lets you know how they’re doing.
A company that’s drowning in debt isn’t likely to be a good investment. Once you’ve identified a few potential investments compare their debt to income (DTI) ratio. This gives you a good idea how they’re doing compared to their competitors and whether investing with them is likely to yield a good return.
Don’t Buy on Hype
Trying to figure out how to profit from pot stocks is made a lot harder by how excited a lot of people are. Many investors make decisions based on emotion and advice from a friend of a friend.
If you want to invest in a disciplined and profitable way you need to focus entirely on the hard figures. People are naturally excited by new and shiny things. If you invest based on those same feelings you’re on a one way road to losses.
Exciting new companies and startups may end up changing the world and making you a lot of money. Always remember though, the numbers have to make sense.
Know When to Sell
When you’re buying any stock as a short term investment you should already know when you want to sell. This doesn’t mean you need to pick a specific time but rather a set of conditions that you want to meet.
When stocks rise there can be tons of emotional pressure to hang onto them so you don’t miss out on further growth. This is a great way to see your investment go from a winner to a loser.
Before you buy a stock make sure you know exactly how much growth you want to achieve before you sell. This allows you to lock in your profits and prevents you from holding too long.
On the same note you need to have firm rules on when to cut your losses. If you invest in something and the value drops holding on in the hope it will go back up isn’t a good move.
It’s generally better to cut your losses and look for a more effective investment.
Keep a Cool Head
The worst thing you can do when investing is panic. Panic makes you think emotionally instead of analytically. It leads you to sell stocks you should hold and hold stocks you should sell. Always keep your eye on the prize and focus on investing to your strategy.