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Investing in CBD stock could turn out to be highly profitable. But how do you know which CBD stock to buy?
CBD stands for cannabidiol. It's a non-psychoactive component of cannabis. Unlike THC, another chemical compound from marijuana, you can't get high from CBD.
But CBD can help people deal with a variety of medical ailments. Doctors prescribe CBD and people use CBD to treat ailments from nausea to seizures to depression.
Most uses of CBD involve CBD oil. A growing number of companies make different types of CBD oils available for sale. And many companies infuse CBD oil into a wide range of products, from capsules to cosmetics.
While nearly all CBD products are purchased over the counter, the U.S. Food and Drug Administration (FDA) has approved one CBD-based medicine. This medicine, known as Epidiolex, was FDA-approved in 2018 to treat seizures in some forms of epilepsy.
There are two types of CBD: pure and synthetic. Pure means the CBD is plant-based, and the CBD is extracted directly from a variety of the cannabis plant, including hemp. Synthetic CBD is created in a lab using ingredients that, when combined, mirror CBD's health effects.
CBD use is exploding in many countries, including the United States. Currently, 33 U.S. states allow the legal use of CBD oil products. Hemp Business Journal estimates that the CBD market will reach $2.1 billion in the U.S. by the end of 2020.
This potential for growth in the CBD market intrigues many investors. And if you're researching cannabis businesses to invest in, CBD stocks should be top of mind too. Let's talk about how you can pick the right CBD stock for your portfolio.
An excellent place to start when you want to invest in CBD stock is by reviewing a company's financial filings.
Most publicly traded companies file financial disclosure forms. In the United States, the U.S. Securities and Exchange Commission (SEC) requires that businesses who sell stock release quarterly and annual financial reports.
These reports contain valuable insights into a company's financial performance. They detail how much money a business made or lost, and through what vehicles it collected revenue.
And these documents are publicly available, often on a company's website.
Other material a business publishes, such as press releases, may not be reliable sources of information. But their financial documents should be trustworthy because the law requires the reports to be accurate.
This expectation of truth is one reason a business's financial reports are a fantastic way to evaluate a company's health. And doing so gives you a big-picture view of the business.
When it comes to CBD stocks, review the financial statements that the companies you're considering investing in filed with the SEC. Make sure you understand how each company makes money, what its expenses consist of, and where it identifies opportunities for growth or possible roadblocks.
You also want to look at how much of the company's stock its executives own. Have any of them recently bought large numbers of shares? If so, that could be a sign they are anticipating growth in their company.
And if a company doesn't have publicly available financial reports, it'll be tough to evaluate that company's financial health.
Not finding these reports doesn't mean the business has anything to hide. But it does mean you won't get important insights into the company's operations.
You'll want to invest in the CBD stock of companies that you can investigate.
Investing in a CBD stock means thinking about the money a company has on-hand and how it can get more capital if it needs it.
Because marijuana is not yet legal at the federal level, many banks and venture capitalists hesitate to invest or loan money to cannabis companies. That includes CBD businesses.
This challenge means cannabis companies have to find other ways to raise money to fund their growth.
Some businesses issue stock when they need capital. Doing so infuses a company with cash.
When a company issues additional stock, it lowers the stock price. A low price sounds great if you're thinking of making an initial investment in CBD stock. You can get more shares for your money. On the other hand, the value of a stock can go down with each new issuance.
But if the company is profitable, it might not need to raise any money.
You'll also want to find out if the business has any investors. If the business does have investors, you'll want to know how much each investor has contributed, and how much of that investment the company has left. This information can help you make your decision about investing in a particular company.
When you understand the financial backing of a CBD stock before buying it, you'll be on the path to making a wise investment.
Pure vs. Synthetic CBD
As we covered above, there are two types of CBD: pure and synthetic.
Pure CBD comes from cannabis plants. And synthetic CBD is made in a lab using ingredients that mirror pure CBD's effects.
Synthetic CBD is an emerging field. Researchers are still trying to understand if synthetic CBD fully replicates the effects of pure CBD. Supporters of synthetic CBD say that it not only mirrors pure CBD, but that it's also a cheaper, more scalable way to provide CBD to a broader market.
In fact, Epidiolex, the solo FDA-approved CBD-based drug, uses synthetic CBD. After all, the biotech cannabis industry mostly uses synthetic CBD.
Synthetic CBD gives drug makers greater control over what they put into their products.
While synthetic CBD is used by drug makers, many of the CBD oil products available to the mass market use pure CBD.
The FDA and others are studying the long-term effects of synthetic CBD. Without the science to understand the differences between pure and synthetic CBD, it isn't entirely clear what, if any, differences there are between the two. And without understanding these differences, there's little regulation of CBD products, regardless if it's pure or synthetic.
Before buying a CBD stock, you should know if the company uses pure or synthetic CBD. Further scientific research and potential new regulations could have significant impacts on businesses dealing in both types of CBD.
Knowing if a company's products contain synthetic or pure CBD is one helpful step when you're buying CBD stock. It's also helpful to know from where a company sources its CBD and how it processes it.
Pure CBD comes from plants in the cannabis family, including hemp. In 2018, the U.S. Congress legalized industrial hemp production. With the legalization of hemp production in the United States, and with the increase in demand for mass-market CBD, hemp production will likely increase.
With increased hemp production, sourcing hemp to create pure CBD could become cheaper. Producing cheaper pure CBD may improve companies' profit margins if their prices remain the same.
If hemp prices fall too low, competition between companies may increase. To remain competitive, a company may lower the prices of its products and reduce their profit margin.
However, having lower prices may make a product more appealing to consumers. With pure CBD in more mass market products, increasing the number of consumers could be very beneficial.
Like all drug makers, synthetic CBD companies will need to respond to government regulations. How a CBD company's supplier responds will impact its business.
Picking the Best CBD Stock
Investing in CBD stock offers vast potential for your portfolio.
CBD products are legal in many countries and most U.S. states. And the CBD market will likely grow into a multibillion-dollar industry.
As with any stock investing, there's risk in buying CBD stock. Because the cannabis industry is new and evolving, understanding the industry can help you when you want to invest.
These are things to look for when you want to buy CBD stocks:
- Read a company's financial filings.
- Know a company's financial backing.
- Understand if it uses pure or synthetic CBD.
- Find out how it sources its CBD.
Following these guidelines can help put your portfolio in a position to reap the rewards of the expanding CBD market.
Check out our comprehensive guide if you'd like to learn more marijuana investing information. The guide helps you discover the many types of cannabis businesses, and it walks you through choosing cannabis stocks.