That means there’s a potentially stable consumer base, particularly for medical and wellness cannabis products. If reclassification helps to lower risk, expand markets and improve liquidity, investors may see a new entry point.

Read More: Vanguard reveals what could be coming for U.S. stocks, and it’s raising alarm bells for retirees. Here’s why and how to protect yourself

The cannabis sector has a history of volatility. Many retail investors were burned in previous hype cycles. Those once-hyped cannabis stocks stagnated, leading to disillusionment in the sector.

While volatility is common in emerging markets, the cannabis sector has some unique challenges. For example, because of marijuana’s classification as a Schedule I drug, cannabis companies aren’t eligible for regular business deductions, which means they suffer high tax penalties that eat away at margins.

The move to Schedule III would significantly ease those tax burdens. But there’s still a need for banking reform, uplisting to major exchanges and broader institutional support.

Cannabis companies still can’t trade on the NASDAQ or NYSE. As a result, they remain on over-the-counter (OTC) markets, which are generally considered riskier and more volatile than centralized exchanges.

“Because the federal status in the U.S. limits many mainstream banks and brokers from serving cannabis companies, many of these firms list in Canada, OTC or on smaller exchanges, thereby reducing liquidity, analyst coverage and institutional access,” according to the Business of Cannabis. “That creates a market in which smaller, less liquid stocks trade on sentiment proxies rather than fundamentals” (6).

Even if marijuana is reclassified, it won’t make banking problems go away.

“Until there is full federal legalization, lending and providing treasury services to cannabis companies will continue to be a banking hurdle, particularly for the larger institutions that need to maintain their FDIC ensured status,” Samantha Gleit, a partner at Feuerstein Kulick, told Reuters (7).

The SAFER Banking Act would allow cannabis companies to access traditional financial services and reduce risk for financial institutions, lenders and insurers. The Act, which has bipartisan support, has not yet passed into law.

Mark Lewis, president of specialty payments with Lüt, a mobile payment app and payment processor, told Investing News Network that while the moment is “historic,” rescheduling is just the beginning. “Until the SAFE Banking Act or 280E is passed, operators will still have to jump through challenging financial hoops to pay their staff, bills or garner investment” (8).

Demographic demand and regulatory change could shape a new chapter for cannabis investing. Certain segments, such as senior-focused wellness brands and biotech firms developing cannabinoid therapies, could benefit from reclassification (perhaps more so than broader consumer-recreational players).

Investors have several options, from buying shares in cannabis companies or pharmaceutical companies researching medical marijuana, as well as ETFs that focus on companies within the cannabis industry, which offer more diversified exposure.

While reclassification could lead to short-term rallies, it could also lead to steep corrections. And challenges lie ahead, since marijuana will still be considered illegal for recreational use at a federal level. Regulatory uncertainty remains a challenge, as does the need for banking reform. A second industry boom would require overcoming these obstacles.

There may be opportunity, but investors will want to focus on companies with strong fundamentals rather than jumping on hype or FOMO, and be prepared for continued volatility.

• Most Americans think 63 is the perfect age to retire — but they’re dead wrong. Here’s the big number to bet your retirement on instead

• Become the landlord of Whole Foods and Walmart without lifting a finger. Here’s why wealthy investors are leaning in — and what to consider before investing

• Warren Buffett used 8 solid, repeatable money rules to turn $9,800 into a $150B fortune. Start using them today to get rich (and stay rich)

• Dave Ramsey says this 7-step plan ‘works every single time’ to kill debt, get rich — and ‘anyone’ can do it

Article sources

We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.

JAMA Internal Medicine (1); DISA (2); Gallup (3); NYU (4, 5); Business of Cannabis (6); Reuters (7); Investing News Network (8)

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.