Clearing the Air about Cannabis Investing

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November 28, 2018 – Canadian cannabis companies’ stockStock An investment that gives you part ownership or shares in a company. Often provides voting rights in some business decisions.+ read full definition prices have skyrocketed in recent years as several jurisdictions have explored new laws around the sale and use of cannabis. In the past few months, however, industry insiders and analysts have expressed concern about whether soaring stock prices have raced ahead of cannabis companies’ growth prospects.

In October 2018, the Ontario Securities CommissionOntario Securities Commission An independent Crown corporation that is responsible for regulating the capital markets in Ontario. Its mandate is to provide protection to investors from unfair, improper or fraudulent practices, to foster fair and efficient capital markets and confidence in capital markets, and to contribute to the stability of the financial system and the reduction of systemic…+ read full definition (OSCOSC See Ontario Securities Commission.+ read full definition) Investor Office commissioned a survey of over 2,000 Canadians from across the country that sheds light on how retail investors have reacted to recent developments in the cannabis sectorSector A part of the economy where businesses provide the same or related products or services. May also refer to a group.+ read full definition.

In Taking Caution, our July 2018 study on cryptoassets, we found that men aged 18-34 were more likely to own cryptoassets than any other demographic group. It appears men in this age group are also the most likely to investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition in (or express interest in investing in) the cannabis sector:

Who’s most likely to invest?

 

Several factors give rise to concern about the risks
retail investors are taking in this emerging sector:

Nearly 1 in 4 cannabis investors reported spending $10,000 or more on their investments.

Cannabis investing rates didn’t vary based on reported risk tolerance or financial knowledge

Those with low financial knowledge or who reported having a low risk tolerance were as likely as individuals with higher knowledge or risk tolerance to own cannabis investments.

Cannabis investing rates didn’t vary based on reported risk tolerance or financial knowledge.

Those with low financial knowledge or who reported having a low risk tolerance were as likely as individuals with higher knowledge or risk tolerance to own cannabis investments.

Note: This survey question asked about respondents’ primary cannabis investments. Investors may hold diversified investments in other sectors.

What drives people to buy into trendy investments?

Behavioural insights show that some investors may be predisposed to seek out and buy into the latest, most popular investments—and may do so even if these investments don’t fit their long-termTerm The period of time that a contract covers. Also, the period of time that an investment pays a set rate of interest.+ read full definition financial goals. These investors may overestimate their risk tolerance and might not diversify their investments enough.

Our survey results indicate that many cannabis investors entered the sector recently, and that word of mouth was a key source of information:

We observed similar patterns with respect to cryptoasset owners earlier in 2018.

Chasing trends can be exciting, but it’s important
to make a long-term plan and stick to it.

Before making an investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition, think about whether and how it fits into that long-term plan, and make sure you think about risks as well as opportunities.

The OSC is here to help:

About the Survey: The OSC Investor Office engaged Innovative Research Group Inc. (Innovative) to conduct a survey to, among other things, better understand Canadians’ investment practices as they relate to cannabis investments. The survey was conducted online among a representative sample of 2,259 Canadians, 18 years of age or older, between October 11 and 22, 2018. The sample has been weighted down to n=2,000 by age, gender and region using the latest Statistics Canada census data to reflect the actual demographic composition of the adult population 18 years of age or older residing in Canada. Since the online survey was not a random probability-based sample, a marginMargin A way to buy investments by borrowing money from a stockbroker. You must also invest some of your own money first. The extra that you borrow is your margin. Some rules apply about the size of margin that you can have.+ read full definition of error cannot be calculated. The Marketing Research and Intelligence Association prohibits statements about margins of sampling error or population estimates with regard to most online panels.

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