weed spliff 3
Image: © Martin Alonso via Wikimedia Commons

Cannabis investors’ high might be in for a come down

Bloomberg says pot stocks are a bubble that will eventually burst.

What it means: There are lots of arguments for legalising weed. ‘Marijuana stocks could make me rich’ isn’t the first one that springs to mind. But that’s what a lot of people are getting really excited about.

In places where cannabis is legal (which now include Canada and some US states) companies that sell it can issue shares (or stocks, which is just a different name for the same thing). A share is a little bit of the company that someone can own if they buy it. Companies sell these shares to raise money to invest in stuff they think will make their businesses better - new products, advertising campaigns, another warehouse, whatever.

The idea is that people buy shares in companies they think are going to make lots of profit, because then they get some of that profit. The more people that want to own shares in a company, the higher its share price will be (because new buyers think it's worth splurging out on something so valuable, and existing shareholders don’t want to sell their cash cow).

But lots of people instead try to make money by speculating on the share price. Basically, they make a bet about what the share price is going to do. The simplest way to speculate is to buy shares at a lower price and sell them at a higher one, but you can also do lots of other complicated things, like bet the share price will go down (FYI, this is called shorting, as in the film The Big Short).

Because nobody can actually know how much profit a company/product/industry will make or what its share price will do, people often bet wrong. Sometimes, when lots and lots of people all become convinced a company/share is going to become ever-more profitable/expensive the shares rise much more than they should (because the company/product/industry will never make enough money to make it worthwhile to buy their shares at that high a price). This is called a bubble. And bubbles burst.

Eventually, some shareholders will realise their stocks are overvalued and sell them. As the share price falls, other shareholders panic about losing money if they can’t sell shares for more than they bought them for. That ends up in a mass selloff and a plummeting share price. Investors who were not quick enough on their feet lose all the money they put into that stock.

So, no matter how good a buzz you think you might get from pot stocks, sometimes it’s best to Just Say No.

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