Pot stocks are smokin’. And with sales of recreational pot now legal in two states, investors are getting renewed warning about the dangers of investing in risky marijuana stocks.
In an alert issued Friday, the Financial Industry Regulatory Authority in Washington, D.C., warned – again – about the potential for fraud, as well as “the risks of investing in thinly traded companies about which little is known. Regardless of industry sector, any so-called ‘hot’ stock can burn your portfolio.”
FINRA said news coverage in January of Colorado’s launch of legal recreational sales has created more buzz on pot-related stocks, which are often traded over-the-counter as penny stocks. They focus on everything from cannabis research to marijuana vending machines to medical pot dispensaries.
In some cases, the trading volume of “otherwise thinly traded, marijuana-related companies increased dramatically – and prices became quite volatile,” FINRA, a nonprofit created by Congress to protect investors, said on its website.
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This week, Bloomberg News reported that shares of a West Hollywood company, Medbox Inc., which makes vending machines for dispensing medical marijuana, soared as much as 85 percent in a single day after the company announced new developments and its CEO appeared on CNBC’s show “Closing Bell.”
In late December, before extensive news coverage of Colorado’s launch of recreational pot sales, Medbox was selling for about $10 a share. Earlier this week, it reached $93.50 before settling Friday at $34.
In California, the state’s Department of Business Oversight “has not experienced any issues along the lines expressed in the FINRA alert,” said spokesman Mark Leyes in an email. “But that alert contains good advice for potential investors who might come across such offerings – or any ‘hot’ stock offerings. We concur with FINRA on the need for folks to learn about companies and individuals before investing.”
Not all pot companies are bogus, of course. But FINRA said that some marijuana stock scams employ classic “pump-and-dump” schemes, where promoters push up the stock price with misleading or false information, then sell off their shares at inflated prices, causing the stock to deflate or become worthless.
Before investing, FINRA reminded consumers to be skeptical of company claims; question the source of unsolicited investment offers by email, text or mail; be aware that over-the-counter stocks are not heavily regulated; and to search online for frequent name changes involving the company, its business focus and any reports about the company’s founders.
For more details, go to www.finra.org.