Pot stocks have been on a tear over the past year, with several posting gains in the triple digits. Many traditional brick-and-mortar brokerage firms do not, as a matter of policy, execute transactions in over-the-counter markets (OTCMKTS), in which many cannabis stocks trade. However, generally, prospective investors can easily buy and sell stocks of publicly traded cannabis companies on their own through platforms, such as E-Trade, TD Ameritrade, Robinhood and Ally Invest.
There are several obvious benefits of online trading. Investors enjoy autonomy and control over their investment strategies and open access to educational tools designed to optimize trades, while avoiding expensive brokerage fees and potential brokerage bias. Many trades may be executed without communicating with a broker at all, in real time, simply by pressing a few buttons on one’s smartphone or computer.
There is a palpable allure to “get in” to cannabis now. For example, since March 2020 (and depending on the day), Curaleaf Holdings Inc. (OTCMKTS:CURLF), which operates in 23 states, is up approximately 310%; Green Thumb Industries Inc. (OTCMKTS:GTBIF), which operates in 12 states, is up more than 520%; Trulieve Cannabis Corp. (OTCMKTS:TCNNF), which has a 51% market share in Florida and operates in three other states, is up more than 500%; and TerrAscend Corp. (OTCMKTS:TRSSF), with sales across Canada, Europe and the U.S., including operations in for states, is up over 650%.
In Canada, in the same time period, Canopy Growth Corp. (NASDAQ:CGC), which enjoys an $18 billion market cap — the largest market cap among all cannabis entities — has increased close to 200%, amid reports that it expects to become profitable next (fiscal) year. Tilray Inc. (NASDAQ:TLRY) and Aphria Inc. (NASDAQ:APHA), which recently announced a merger deal that would make the combined company the largest cannabis enterprise in the world by revenue, have seen gains of approximately 177% and 550%, respectively.
These gains, in just under a year, particularly in the U.S., are largely fueled by expectations of the new Democratic-controlled U.S. Congress, in which Senate Majority Leader Chuck Schumer committed in early February to make cannabis reform a priority, and Jazz Pharmaceuticals’ announcement also in early February of its $7.2 billion acquisition of GW Pharma (the producer of the first FDA-approved cannabis-based medicine, Epidiolex), solidifying the multibillion-dollar demand for medical cannabis products.
While the growth of cannabis public markets has been impressive, it has not been without significant volatility and risk. For instance, on February 11, 2021, WallStreetBets, the same Reddit “army” that contributed to the “epic squeeze” of GameStop stock in January 2021, encouraged its members to make Tilray the next GameStop, in view of Tilray’s pending merger deal with Aphria. Tilray stock, which had already been up over 60%, rose more than 50% in a single day, only to erase its gains and come crashing down 49%, just 24 hours later.
Notwithstanding the excitement and simplicity of trading cannabis stocks online, it is important to approach online trading as a business — not a game — and be aware that there are multiple risks involved. It is easy to invest too much, too fast, feeding into the same serotonin-induced highs and addictive behavior patterns associated with gambling. While many trades may be executed in real time, investors are nonetheless at the mercy of their internet connections and platform functionality, which may be delayed, interrupted or unavailable, causing them to lose out on price limits or important trades during periods of volatility, among other potential problems.
To this end, the National Association for Securities Dealers (NASD) has recommended that online trading platforms disclose that high trading volumes may cause delays and that transaction prices may be different from what is shown online at the time a trade is placed; alert customers that losses may result from systems problems; and refrain from making exaggerated claims about the speed or reliability of their respective trading services. And prospective investors should take the time to analyze whether the online trading platform of their choice actively monitors system capacity and provides alternate means to take action on their accounts during downtimes, such as via telephone or in-person.
Further, information provided in online communications are not guaranteed to be up-to-date, accurate or complete, and unsuspecting investors might not be able to decipher what information constitutes a platform’s “recommendation” to buy any particular security. Because online trading is primarily self-directed, those same unsuspecting investors may not have the same recourse against an online trading platform as they would against a registered securities broker, who is bound by NASD-imposed duties to, among other things, understand their customers’ financial needs, investment objectives and other pertinent information before recommending any particular security or portfolio of securities (the “Know Your Customer Rule”) and to have a reasonable basis to believe that a securities transaction recommended to a customer is suitable for that particular customer, in view of the customer’s financial and other circumstances (the “Suitability Rule”). Major exchanges, including the NYSE and AMEX impose similar rules upon brokers.
Provided that investors remain aware of these risks, embracing an autonomous online trading platform over the stability of brokers could be a worthy trade.