Avoid These Common Mistakes When Investing in Hemp Stock

Hemp stocks might be down from highs set earlier in the year, but they continue to be in rally mode. With continued progress on the state and federal level – in terms of legalization, taxation, research, and banking – hemp stock prices are increasing.

In 2018, when California legalized hemp, the media coverage it inspired brought in quite a few investors in the hemp sector, many of which were new to investing. The number of companies that have shot at succeeding has increased dramatically over the past few years. However, many hemp stocks have little chance of succeeding.

The rapid growth of sales, the steady popularity, and the growing acceptance of cannabis as a mainstream product is what is driving investors to want to invest in marijuana stocks since the beginning of 2016. Just over three years, many of them have seen their stock prices rise by triple- or quadruple-digit percentages.

Falling for the Behavioral Bias

Not every hemp stock is going to be a winner – that’s why you need to do extensive research on these companies to avoid a behavioral bias that can easily happen in this industry. What is the behavioral bias? It’s the overly strong desire for companies with a single digit, or below $1, share prices.

The theory behind this is that owning more shares of stock (i.e., buying thousands of shares in a company with a low stock price) will give them a better chance at earning money than buying the stock at, say, $100 per share.

Relying on the share price only and not paying attention to the market cap – the stock price multiplied by the number of outstanding shares) or the risks that could potentially happen is setting you up for failure.

With this in mind, we’re going to now go over some of the most common mistakes that investors do that hurts them in the long run. If you want to invest in hemp stock, we suggest that you take a look at these mistakes and try your best to avoid them.

Failure to Diversify

There are quite a few first-time investors that invest in only one or two companies when they’re first starting. This is a very risky strategy to follow, especially in the hemp sector, because it consists of many companies that don’t have much operating experience. If you want a long-term focused portfolio model, you should consider investing in more hemp firms – the best-diversified portfolios are typically filled with 18 to 24 different stocks.

Having only a few investment positions is very risky because you have the chance of having a large loss (or large gain, if we’re honest) is much higher than when you diversify your portfolio into multiple stocks.

Another reason to diversify is that not many hemp stocks are generating positive cash flow, and many of them need convertible notes to fund their operations. Using convertible notes as a financing tool leads to long-term pressure on stocks – the convertible debt is offered at a discount of the market price of the share, which drives the stock price down.

Too Much Diversification

On the other hand, some first-time investors start building their portfolios with many stocks. Diversifying your portfolios, however, is less risky than not being diversified, but it’s still possible for you to have too much diversification. For example, adding 40 companies with negative expected returns isn’t going to improve your portfolio.

As mentioned earlier, there aren’t many hemp stocks that one would want to invest in right now. So, building a portfolio with 60 stocks would force you to include some bad stocks among the good. You should be diversified in your investment holdings, but you should also try to include stocks that have positive expected returns.  

Relying on Press Releases

Failure to do due diligence is by far the biggest and worst mistake an investor can make. Many hemp investors rely upon company press releases as one of the main sources of information regarding the company, but they’re ignoring the better option for information: the company’s filings.

Avoid Penny Stocks

Stay away from hemp penny stocks! The SEC has pointed out numerous times that many (not all) publicly traded cannabis companies are vehicles for investment fraud. Most companies are focused on selling their stock instead of competing in the market. The mentality of investors is to encourage this.

Here’s an example of how that logic goes: the marijuana industry is booming. Therefore, their businesses are booming. With that being said, then all marijuana businesses are booming – I need to invest in these companies. The only way for me to do this is to invest in publicly traded cannabis industry companies.

All that this mentality leads to is pump and dump scams where the people behind the scam increase the trading and demand volume in the stock market to produce more of an inflow of investors, which leads to a sharp increase in the price. Once the price has risen, the scammers sell their position to make a larger short-term gain.

 

This article is provided by SundayScaries.

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Brian Penny is a former Business Analyst and Operations Manager at Bank of America turned whistleblower, troll, and freelance writer.

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