Cannabis investors should look out for these penny stock pitfalls

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Investment Outlook

Established marijuana companies are generally less risky than newly launched cannabis penny stocks. Those pennies promise big gains, but those gains are offset by multiple risks we reveal below. Here are five tips to help you minimize penny stock risks.


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Established marijuana producers such as Canopy Growth, Tilray and Aurora Cannabis continue to attract the interest of investors looking to add to the aggressive portion of their stock portfolios.

Prices of these stocks are down lately, but are still way up since 2016—and those high share prices may tempt some investors to look for the next “up-and-coming” low-priced cannabis stock.

There is a continual stream of new marijuana penny stocks. Most trade over-the-counter in the U.S., but Canadians can buy them through their brokers. These have come on the market aiming to take advantage of upcoming legalization in Canada and strong investor interest.

However, buying lower quality marijuana penny stocks is one of those moves that can appear to be successful before it goes wrong. Some investors get hooked on it, since low-quality stocks can be highly profitable over short periods. That’s because they are generally more volatile than high-quality stocks.

It may be appealing to look for penny marijuana stocks to buy, but there will also be significant risks.

Penny stocks do sometimes pay off, but there are big pitfalls to avoid.

When you buy penny stocks you could have a big payday if you make the right choice. But the odds against success are high.

Be aware that many penny stocks are little more than very well executed marketing campaigns. Penny stock promoters will do anything in their power to get their penny stock noticed. These extensive marketing campaigns include emails, TV interviews, podcasts, newsletters and paid sponsorships.

There are also some so-called news sites that will sell sponsorships to penny stock promoters. These are great opportunities for penny stock promoters but not for investors looking for an unbiased opinion on a stock.

Penny stock promoters love to make deals—however minor or indirect—with major, well-known firms. These deals are aimed at gaining the trust of investors. For example, a cannabis penny stock may issue a press release announcing that some big marijuana producer has agreed to look at, say, their “revolutionary” growing technology. The promoters of the penny stock hope that the link with a major brand will give them instant credibility, even if the deal far from guarantees any sales or profits.

Follow these tips to profit from penny stock investing—including cannabis pennies

  • Avoid penny stocks that trade at unsustainably high prices because of broker hype or investor mania about the underlying commodity.
  • Look out for acquisitions. Acquisitions can bring “time-bomb” risk. Companies sometimes grow quickly by buying other companies. But it may also be the case that those selling the companies may simply want to bail out of a losing situation.
  • Look for earnings or cash flow. A perpetual money loser will eventually go broke, no matter how impressive its technology. But if it makes even a little money, it can stay in business and perhaps reap the bonanza of a new product.
  • Spread your penny stocks out across different market segments. When making a list of penny stocks, we recommend investing in a range of markets. This includes software, biotech, technology, mineral exploration and so on.
  • Apply our sell-half rule. Selling half your holdings after you double your investment is a good strategy for any high-risk investment, but especially so for penny stocks. This can give you a clearer perspective on what to do with the other half of your investment. After all, if you are too slow to sell speculative stuff, your profits and even your principal can evaporate all too quickly.

We haven’t found any cannabis penny stocks worthy of buying

These days, it’s faster and easier than ever to launch a stock promotion, thanks to the Internet.

Overall, we advise staying out of penny stock promotions. They attract the wrong kind of people. Stock promotion is a take-the-money-and-run type of business. Most successful entrepreneurs value their reputations, and want to build a profitable, sustainable business that can pay off for investors. So they generally go into some other line of work, and stay out of stock promotion.


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