With the state of Washington approving rules for the legal sale of marijuana to anyone over 21 late last year, and Colorado's legalization of the sale of marijuana effective Jan. 1, the prices of many pot penny stocks have soared.
For example, in the past month, GreenGro Technologies Inc. (OTC: GRNH) is up 1,210% (after having risen as much as 2,100%), Cannibis Science Inc. (OTC: CBIS) is up 183%, and Hemp Inc. (OTC: HEMP) is up 359%.
Hemp Chief Executive Officer Bruce Perlowin told Bloomberg News investors in pot penny stocks are looking for "the next Microsoft."
"The demand for marijuana is insatiable," said Perlowin. "You have a feeding frenzy for the birth of a new industry."
Why Pot Penny Stocks Are Smoking
But it's not just what's happening in Colorado and Washington state that has investors gobbling up pot penny stocks.
The legalization of marijuana for medical purposes is much more widespread, with 18 other states and the District of Columbia already on board, and more states are considering it.
And recent polls have shown that the public is increasingly in favor of legalizing marijuana. In a CNN poll released a week ago, 55% of the respondents said marijuana should be legalized.
Just 27 years ago, in 1987, only 16% were in favor of legalization. Even a little more than a decade ago, in 2002, only 34% favored making marijuana legal. That means it's likely more states will follow the examples of Colorado and Washington in the years ahead.
"This is unquestionably a tremendous growth industry," Betty Aldworth, deputy director of the National Cannabis Industry Association, told CNN. "There hasn't been an opportunity like this in American history in quite some time. The tech boom had an impact on the American economy, but I think this could rival it. We're not creating a market out of nothing. We are just shifting it from the underground market."
Well, the legalization of marijuana might not quite rival the tech boom. But there is plenty of money to be made...
Sales of government-regulated marijuana are projected to more than double this year from $1 billion to $2.3 billion. And Bloomberg Industries projects that eventually could grow into an industry with annual sales of $35 billion to $45 billion.
How to Invest in Pot Penny Stocks
While the recent mammoth returns on marijuana stocks can be very, very tempting, there are several caveats here that investors need to know before committing any portion of their money.
When considering how to invest in pot penny stocks, keep in mind we are talking about penny stocks. Such stocks by nature tend to be volatile and far more risky than conventional stocks.
For example, penny stocks don't trade on the major exchanges, but on the so-called "pink sheets" or the over-the-counter bulletin board. Such venues lack many of the safeguards you get at the New York Stock Exchange or the Nasdaq.
Plus, penny stocks typically are not very liquid, meaning the volume of shares traded every day is fairly low. That means it can be hard to exit a stock when things turn against you, which can lead to even bigger losses.
And that low volume, coupled with their extremely low prices, leaves penny stocks vulnerable to manipulation by unscrupulous operators.
Finally, those rapid run-ups in price can reverse just as quickly. Penny stocks are notoriously volatile. [To learn more about these wild-moving investments, read What Are Penny Stocks?]
But all that doesn't mean you can't put a small portion of your portfolio (very small, as in no more than 5%) into some carefully selected choices, including some of these pot penny stocks.
In addition to Hemp, Cannibis, and GreenGro, some other pot penny stocks include Transzbyte Corp. (OTC: ERBB), Growlife Inc. (OTC: PHOT), Medical Marijuana Inc. (OTC: MJNA), and even vending machine maker AVT Inc. (OTC: AVTC), which now is selling pot vending machines.
Still, when facing so much risk, investors might be better off hedging a bit rather than gambling on one or two pot penny stocks.
"You want to do it with a basket, knowing a couple of them will blow up and do really well, with the rest somewhere in the middle," Bruce Campbell, a fund manager with StoneCastle Investment Management Inc., told Bloomberg News. "Your basket will probably give you some good returns over the next five to 10 years."
Once you know exactly what to look for, penny stocks can be a very rewarding part of your investing strategy. Here's how to find the best penny stocks on the market while avoiding the losers...