{"appState":{"pageLoadApiCallsStatus":true},"categoryState":{"relatedCategories":{"headers":{"timestamp":"2022-06-23T18:31:20+00:00"},"categoryId":34288,"data":{"title":"Investing","slug":"investing","image":{"src":null,"width":0,"height":0},"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Personal Finance","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34273"},"slug":"personal-finance","categoryId":34273},{"name":"Investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34288"},"slug":"investing","categoryId":34288}],"parentCategory":{"categoryId":34273,"title":"Personal Finance","slug":"personal-finance","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34273"}},"childCategories":[{"categoryId":34289,"title":"Energy","slug":"energy","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34289"},"image":{"src":"/img/background-image-2.fabfbd5c.png","width":0,"height":0}},{"categoryId":34290,"title":"Investment Vehicles","slug":"investment-vehicles","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34290"},"image":{"src":"/img/background-image-1.daf74cf0.png","width":0,"height":0}},{"categoryId":34299,"title":"Real Estate","slug":"real-estate","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34299"},"image":{"src":"/img/background-image-2.fabfbd5c.png","width":0,"height":0}},{"categoryId":34300,"title":"General Investing","slug":"general-investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34300"},"image":{"src":"/img/background-image-1.daf74cf0.png","width":0,"height":0}},{"categoryId":34353,"title":"Day Trading","slug":"day-trading","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34353"},"image":{"src":"/img/background-image-2.fabfbd5c.png","width":0,"height":0}}],"description":"Ever heard the expression, \"It takes money to make money\"? We'll teach you how to go from rags to riches (or from riches to even more riches) in stocks, bonds, real estate, and more.","relatedArticles":{"self":"https://dummies-api.dummies.com/v2/articles?category=34288&offset=0&size=5"}},"_links":{"self":"https://dummies-api.dummies.com/v2/categories/34288"}},"relatedCategoriesLoadedStatus":"success"},"listState":{"list":{"count":10,"total":1550,"items":[{"headers":{"creationTime":"2018-04-16T04:32:12+00:00","modifiedTime":"2022-05-27T14:51:01+00:00","timestamp":"2022-06-22T19:37:41+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Personal Finance","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34273"},"slug":"personal-finance","categoryId":34273},{"name":"Investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34288"},"slug":"investing","categoryId":34288},{"name":"General Investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34300"},"slug":"general-investing","categoryId":34300}],"title":"First Priorities: Paying Off High-Cost Debt and Building a Safety Reserve","strippedTitle":"first priorities: paying off high-cost debt and building a safety reserve","slug":"first-priorities-paying-off-high-cost-debt-building-safety-reserve","canonicalUrl":"","seo":{"metaDescription":"Plenty of younger folks have debts to pay and lack an emergency reserve of money for unexpected expenses. High-cost debts, such as on a credit card, can be a ma","noIndex":0,"noFollow":0},"content":"Plenty of younger folks have debts to pay and lack an emergency reserve of money for unexpected expenses. High-cost debts, such as on a credit card, can be a major impediment to investing, in particular, and accomplishing your future personal and financial goals, in a broader sense. A high interest rate keeps the debt growing and can cause your debt to spiral out of control, which is why dealing with such consumer debt should be your first priority, just before establishing an emergency reserve.\r\n<h2 id=\"tab1\" >Pay off high-cost consumer debt</h2>\r\nPaying down debts isn’t nearly as exciting as investing, but it can make your investment decisions less difficult. Rather than spending your time investigating specific investments, paying off your debts with money you’ve saved may indeed be your best investment.\r\n\r\nConsumer debt includes borrowing on credit cards, auto loans, and the like, which are often costly ways to borrow. Banks and other lenders charge higher interest rates for consumer debt than for debt for investments, such as real estate and business, because consumer loans are the riskiest type of loans for a lender. Risk means the chance of the borrower’s defaulting and being unable to pay back all that he or she borrowed.\r\n\r\nMany folks have credit card debt that costs 18 percent or more per year in interest. Some credit cards levy interest rates well above 20 percent if you make a late payment or two. Reducing and eventually eliminating this debt with your savings is like putting your money in an investment with a guaranteed tax-free return equal to the rate that you pay on your debt.\r\n\r\nFor example, if you have outstanding credit card debt at 18 percent interest, paying off that debt is the same as putting your money to work in an investment with a guaranteed 18 percent tax-free annual return. Because the interest on consumer debt isn’t tax-deductible, you would need to earn more than 18 percent by investing your money elsewhere to net 18 percent after paying taxes. Earning such high investing returns is highly unlikely, and to earn those returns, you’d be forced to take great risk.\r\n<p class=\"article-tips remember\">Consumer debt is hazardous to your long-term financial health (not to mention damaging to your credit score and future ability to borrow for a home or otherwise investments) because it encourages you to borrow against your future earnings.</p>\r\n<p class=\"article-tips tip\">Tapping credit card debt may make sense if you’re financing a business. If you don’t have home equity, personal loans (through a credit card or auto loan) may actually be your lowest-cost source of small-business financing.</p>\r\n\r\n<h2 id=\"tab2\" >Establish an emergency reserve</h2>\r\nYou never know what life will bring, so having an accessible reserve of cash to meet unexpected expenses makes good financial sense. If you have generous parents or dear relatives, you can certainly consider using them as your emergency reserve. Just be sure you ask them in advance how they feel about that before you count on receiving funding from them. If you don’t have a financially flush family member, the onus is on you to establish a reserve.\r\n<p class=\"article-tips tip\">You should have at least three months’ worth of living expenses to as much as six months’ worth of living expenses as an emergency reserve. Invest this personal-safety-net money in a money market fund. You may also be able to borrow against your employer-based retirement account or against your home equity, should you find yourself in a bind, but these options are much less desirable.</p>\r\nIf you don’t have a financial safety net, you may be forced, under duress, to sell an investment (at a relatively low price) that you’ve worked hard for. And selling some investments, such as real estate, can take time and cost significant money (transaction costs, taxes, and so on).\r\n<p class=\"article-tips remember\">Riskier investments like stocks aren’t a suitable place to keep your emergency money invested. While stocks historically have returned about 9 percent per year, about one-third of the time, stocks decline in value in a given year, sometimes substantially. Stocks can drop and have dropped 20, 30, or 50 percent or more over relatively short periods of time. Suppose that such a decline coincides with an emergency, such as the loss of your job or a health problem that creates major medical bills. Your situation may force you to sell at a loss, perhaps a substantial one. Stocks are intended to be a longer-term investment, not an investment that you expect (or need) to sell in the near future.</p>","description":"Plenty of younger folks have debts to pay and lack an emergency reserve of money for unexpected expenses. High-cost debts, such as on a credit card, can be a major impediment to investing, in particular, and accomplishing your future personal and financial goals, in a broader sense. A high interest rate keeps the debt growing and can cause your debt to spiral out of control, which is why dealing with such consumer debt should be your first priority, just before establishing an emergency reserve.\r\n<h2 id=\"tab1\" >Pay off high-cost consumer debt</h2>\r\nPaying down debts isn’t nearly as exciting as investing, but it can make your investment decisions less difficult. Rather than spending your time investigating specific investments, paying off your debts with money you’ve saved may indeed be your best investment.\r\n\r\nConsumer debt includes borrowing on credit cards, auto loans, and the like, which are often costly ways to borrow. Banks and other lenders charge higher interest rates for consumer debt than for debt for investments, such as real estate and business, because consumer loans are the riskiest type of loans for a lender. Risk means the chance of the borrower’s defaulting and being unable to pay back all that he or she borrowed.\r\n\r\nMany folks have credit card debt that costs 18 percent or more per year in interest. Some credit cards levy interest rates well above 20 percent if you make a late payment or two. Reducing and eventually eliminating this debt with your savings is like putting your money in an investment with a guaranteed tax-free return equal to the rate that you pay on your debt.\r\n\r\nFor example, if you have outstanding credit card debt at 18 percent interest, paying off that debt is the same as putting your money to work in an investment with a guaranteed 18 percent tax-free annual return. Because the interest on consumer debt isn’t tax-deductible, you would need to earn more than 18 percent by investing your money elsewhere to net 18 percent after paying taxes. Earning such high investing returns is highly unlikely, and to earn those returns, you’d be forced to take great risk.\r\n<p class=\"article-tips remember\">Consumer debt is hazardous to your long-term financial health (not to mention damaging to your credit score and future ability to borrow for a home or otherwise investments) because it encourages you to borrow against your future earnings.</p>\r\n<p class=\"article-tips tip\">Tapping credit card debt may make sense if you’re financing a business. If you don’t have home equity, personal loans (through a credit card or auto loan) may actually be your lowest-cost source of small-business financing.</p>\r\n\r\n<h2 id=\"tab2\" >Establish an emergency reserve</h2>\r\nYou never know what life will bring, so having an accessible reserve of cash to meet unexpected expenses makes good financial sense. If you have generous parents or dear relatives, you can certainly consider using them as your emergency reserve. Just be sure you ask them in advance how they feel about that before you count on receiving funding from them. If you don’t have a financially flush family member, the onus is on you to establish a reserve.\r\n<p class=\"article-tips tip\">You should have at least three months’ worth of living expenses to as much as six months’ worth of living expenses as an emergency reserve. Invest this personal-safety-net money in a money market fund. You may also be able to borrow against your employer-based retirement account or against your home equity, should you find yourself in a bind, but these options are much less desirable.</p>\r\nIf you don’t have a financial safety net, you may be forced, under duress, to sell an investment (at a relatively low price) that you’ve worked hard for. And selling some investments, such as real estate, can take time and cost significant money (transaction costs, taxes, and so on).\r\n<p class=\"article-tips remember\">Riskier investments like stocks aren’t a suitable place to keep your emergency money invested. While stocks historically have returned about 9 percent per year, about one-third of the time, stocks decline in value in a given year, sometimes substantially. Stocks can drop and have dropped 20, 30, or 50 percent or more over relatively short periods of time. Suppose that such a decline coincides with an emergency, such as the loss of your job or a health problem that creates major medical bills. Your situation may force you to sell at a loss, perhaps a substantial one. Stocks are intended to be a longer-term investment, not an investment that you expect (or need) to sell in the near future.</p>","blurb":"","authors":[{"authorId":8975,"name":"Eric Tyson","slug":"eric-tyson","description":" <p><b>Eric Tyson </b>is a veteran Dummies author of numerous bestselling books in the investing and personal finance space.</p> <p><b>Paul Mladjenovic</B> is a Certified Financial Planner and the bestselling author of <i>Stock Investing For Dummies.</i> <p><B>Kiana Danial</B> is an investment consultant and trainer and the author of <i>Cryptocurrency Investing For Dummies.</i> <p><b>Russell Wild </B>is the author or coauthor of nearly two dozen books, including <i>ETFs For Dummies.</i> <p><b>Matt Krantz </b>is a nationally known financial journalist and the author of <i>Online Investing For Dummies. </i> <p><b>Robert Griswold</b> is a successful real estate investor and property manager and the co-author of <i>Real Estate Investing For Dummies.</i> <p><b>Steven Gormley</B> is a celebrated expert in the legal marijuana sector and author of <i>Investing in Cannabis For Dummies.</i> <p><b>Brendan Bradley</b> is a financial market professional and the author of <i>ESG Investing For Dummies.</i> ","_links":{"self":"https://dummies-api.dummies.com/v2/authors/8975"}}],"primaryCategoryTaxonomy":{"categoryId":34300,"title":"General Investing","slug":"general-investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34300"}},"secondaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"tertiaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"trendingArticles":null,"inThisArticle":[{"label":"Pay off high-cost consumer debt","target":"#tab1"},{"label":"Establish an emergency reserve","target":"#tab2"}],"relatedArticles":{"fromBook":[{"articleId":251826,"title":"Investing in Your 20s and 30s: Tips to Maximize Your Stock Market Returns","slug":"investing-20s-30s-tips-maximize-stock-market-returns","categoryList":["technology","computers","macs","general-macs"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/251826"}},{"articleId":251823,"title":"Investing in Your 20s and 30s: Sidestep Common Minefields","slug":"investing-20s-30s-sidestep-common-minefields","categoryList":["technology","computers","macs","general-macs"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/251823"}},{"articleId":251820,"title":"Investing in Your 20s and 30s: Avoid Temptations and Hype","slug":"investing-20s-30s-avoid-temptations-hype","categoryList":["technology","computers","macs","general-macs"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/251820"}},{"articleId":251817,"title":"Investing in Your 20s and 30s: Alternatives to Money Market Mutual Funds","slug":"investing-20s-30s-alternatives-money-market-mutual-funds","categoryList":["technology","computers","macs","general-macs"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/251817"}},{"articleId":251814,"title":"Investing in Your 20s and 30s: Alternatives to Bank Accounts","slug":"investing-20s-30s-alternatives-bank-accounts","categoryList":["technology","computers","macs","general-macs"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/251814"}}],"fromCategory":[{"articleId":287556,"title":"Options Trading For Dummies Cheat Sheet","slug":"options-trading-for-dummies-cheat-sheet","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/287556"}},{"articleId":285735,"title":"What Is ESG Investing?","slug":"what-is-esg-investing","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/285735"}},{"articleId":285761,"title":"Just When You Thought It Was Safe: Coronawashing","slug":"just-when-you-thought-it-was-safe-coronawashing","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/285761"}},{"articleId":273978,"title":"Investing For Canadians All-in-One For Dummies","slug":"investing-for-canadians-all-in-one-for-dummies","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/273978"}},{"articleId":265694,"title":"Online Investing: Get More with a Discount Broker","slug":"online-investing-get-more-with-a-discount-broker","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/265694"}}]},"hasRelatedBookFromSearch":false,"relatedBook":{"bookId":282312,"slug":"investing-in-your-20s-30s-for-dummies","isbn":"9781119805403","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"amazon":{"default":"https://www.amazon.com/gp/product/1119805406/ref=as_li_tl?ie=UTF8&tag=wiley01-20","ca":"https://www.amazon.ca/gp/product/1119805406/ref=as_li_tl?ie=UTF8&tag=wiley01-20","indigo_ca":"http://www.tkqlhce.com/click-9208661-13710633?url=https://www.chapters.indigo.ca/en-ca/books/product/1119805406-item.html&cjsku=978111945484","gb":"https://www.amazon.co.uk/gp/product/1119805406/ref=as_li_tl?ie=UTF8&tag=wiley01-20","de":"https://www.amazon.de/gp/product/1119805406/ref=as_li_tl?ie=UTF8&tag=wiley01-20"},"image":{"src":"https://www.dummies.com/wp-content/uploads/investing-in-your-20s-30s-for-dummies-3e-cover-9781119805403-203x255.jpg","width":203,"height":255},"title":"Investing in Your 20s & 30s For Dummies","testBankPinActivationLink":"","bookOutOfPrint":false,"authorsInfo":"<p><b data-author-id=\"8975\">Eric Tyson, MBA,</b> is a bestselling personal finance author, counselor, and writer. He is the author of the national bestselling financial books <i>Investing For Dummies, Personal Finance For Dummies,</i> and <i>Home Buying Kit For Dummies</i>.</p>","authors":[{"authorId":8975,"name":"Eric Tyson","slug":"eric-tyson","description":" <p><b>Eric Tyson </b>is a veteran Dummies author of numerous bestselling books in the investing and personal finance space.</p> <p><b>Paul Mladjenovic</B> is a Certified Financial Planner and the bestselling author of <i>Stock Investing For Dummies.</i> <p><B>Kiana Danial</B> is an investment consultant and trainer and the author of <i>Cryptocurrency Investing For Dummies.</i> <p><b>Russell Wild </B>is the author or coauthor of nearly two dozen books, including <i>ETFs For Dummies.</i> <p><b>Matt Krantz </b>is a nationally known financial journalist and the author of <i>Online Investing For Dummies. </i> <p><b>Robert Griswold</b> is a successful real estate investor and property manager and the co-author of <i>Real Estate Investing For Dummies.</i> <p><b>Steven Gormley</B> is a celebrated expert in the legal marijuana sector and author of <i>Investing in Cannabis For Dummies.</i> <p><b>Brendan Bradley</b> is a financial market professional and the author of <i>ESG Investing For Dummies.</i> ","_links":{"self":"https://dummies-api.dummies.com/v2/authors/8975"}}],"_links":{"self":"https://dummies-api.dummies.com/v2/books/"}},"collections":[],"articleAds":{"footerAd":"<div class=\"du-ad-region row\" id=\"article_page_adhesion_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_adhesion_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;general-investing&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781119805403&quot;]}]\" id=\"du-slot-62b36f8588433\"></div></div>","rightAd":"<div class=\"du-ad-region row\" id=\"article_page_right_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_right_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;general-investing&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781119805403&quot;]}]\" id=\"du-slot-62b36f8588b3c\"></div></div>"},"articleType":{"articleType":"Articles","articleList":null,"content":null,"videoInfo":{"videoId":null,"name":null,"accountId":null,"playerId":null,"thumbnailUrl":null,"description":null,"uploadDate":null}},"sponsorship":{"sponsorshipPage":false,"backgroundImage":{"src":null,"width":0,"height":0},"brandingLine":"","brandingLink":"","brandingLogo":{"src":null,"width":0,"height":0}},"primaryLearningPath":"Explore","lifeExpectancy":"Two years","lifeExpectancySetFrom":"2022-05-27T00:00:00+00:00","dummiesForKids":"no","sponsoredContent":"no","adInfo":"","adPairKey":[]},"status":"publish","visibility":"public","articleId":251804},{"headers":{"creationTime":"2017-10-26T11:57:36+00:00","modifiedTime":"2022-05-26T14:16:24+00:00","timestamp":"2022-06-22T19:37:41+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Personal Finance","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34273"},"slug":"personal-finance","categoryId":34273},{"name":"Investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34288"},"slug":"investing","categoryId":34288},{"name":"Investment Vehicles","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34290"},"slug":"investment-vehicles","categoryId":34290}],"title":"Tips for Working with Trend-Following Trading Systems","strippedTitle":"tips for working with trend-following trading systems","slug":"tips-working-trend-following-trading-systems","canonicalUrl":"","seo":{"metaDescription":"Many trend‐following trading systems use a moving average for their starting points. In this trend‐following example, the system is designed for position tradin","noIndex":0,"noFollow":0},"content":"Many trend‐following trading systems use a moving average for their starting points. In this trend‐following example, the system is designed for position trading, which means you use a relatively long moving average. Short selling isn’t permitted with this simple system.\r\n\r\nThe first step is to define buy and sell rules for your initial testing. The actual code for defining these rules depends on your specific system‐development package. Therefore, trading rules are described as generally as possible. The rules for an initial test may look like this:\r\n<ul>\r\n \t<li>Buy at tomorrow’s opening price when today’s price crosses and closes above the 50‐day exponential moving average (EMA).</li>\r\n \t<li>Sell at tomorrow’s opening price when today’s price crosses and closes below the 50‐day EMA.</li>\r\n</ul>\r\nTo test whether using a moving average as a starting point is a good idea in a trend‐following system, apply these two rules to ten years of historical data for the stocks of your choice. After testing this idea, you find that this simple system works fairly well when stock prices are trending, but it’s likely to trigger many losing trades when the prices of stocks are range bound.\r\n\r\nYou can try to avoid these losing trades, and possibly improve your overall trading results, by filtering out trading‐range situations. One way to accomplish that goal is by changing the buy rule to read as follows: Buy at tomorrow’s open when the following conditions are true:\r\n<ul>\r\n \t<li>Today’s closing price is above the 50‐day EMA.</li>\r\n \t<li>The stock crossed above the 50‐day EMA sometime during the last 5 days.</li>\r\n \t<li>Today’s 50‐day EMA is greater than the 50‐day EMA from 5 days ago.</li>\r\n</ul>\r\nThese added conditions serve as signal confirmation. When you test these rules, you find they reduce the number of whipsaw trades for most stocks, but they’re also likely to delay buy and sell signals on profitable trades and thus usually result in smaller profits on those trades. However, this adjustment makes the overall system more profitable because the number of losses is reduced.\r\n\r\nYou can find out whether other changes that you can make in your simple system can actually improve profitability. You may, for example, test different types of moving averages. Try, for example, a simple moving average (SMA) instead of an exponential moving average (EMA). Or you may want to try using different time frames for your moving average, such as 9‐day, 25‐day, or 100‐day moving ­averages.\r\n<h2 id=\"tab1\" >Identifying system‐optimization pitfalls</h2>\r\nMost system‐development and testing software comes equipped with a provision for system optimization, which allows you to fine‐tune the technical analysis tools used in your trading system. You can, for example, tell the system to find the time frame of the moving average that produces the highest profit for one stock and then ask it to do the same thing for a different stock. Some systems enable you to test this factor simultaneously for many stocks.\r\n<p class=\"article-tips warning\">Although this approach is alluring, using it is likely to cause you trouble. If you find, for example, that a 22‐day moving average works best for one stock, a 37‐day moving average works best for the next stock, and another stock performs best using a 74‐day moving average, you’re going to run into problems. The set of circumstances leading to these optimized results won’t likely repeat in precisely the same way again in the future. It’s almost guaranteed that whatever optimized parameters you may find for these moving averages won’t be the optimal choices when trading real capital.</p>\r\nThis is a simple example of a problem that’s well known to scientists and economists who build mathematic models to forecast future events. It’s called <em>curve fitting</em> because you’re molding your model to fit the historical data. You can expend quite a bit of effort fine‐tuning a system to identify all the major trends and turning points in historical data for a particular stock, but that effort isn’t likely to result in future trading profits. In that case, your optimized system is more likely to cause a long string of losses rather than profits.\r\n<p class=\"article-tips remember\">Testing a long moving average and comparing the results to a short moving average is fine, and so is testing a few points in between a long moving average and a short moving average. As long as you use this exercise to understand why short moving averages work best for short‐term trades and why longer moving averages work better for traders with longer trading horizons, you’ll be fine. Otherwise, you’re probably moving into the realm of curve fitting and becoming frustrated with your actual trading results.</p>\r\n\r\n<h2 id=\"tab2\" >Testing with blind simulation</h2>\r\n<em>Blind simulation</em> is a method for setting aside enough historical data so you can test your system‐optimization results and avoid the problem of curve fitting. For example, you may test data from 1990 through 1999 and thus exclude data from 2000 through the present. After you’ve developed a system that looks good enough for you to base your trades on, you can then test your system against the data that was excluded.\r\n\r\nIf the system performs as well with the excluded data as it did with the original test data, you may have a system worth trading. If it fails, you obviously need to rethink your system.\r\n\r\nAnother approach is choosing your historical data with extreme care. You can expect trend‐following systems like a moving‐average system to perform well during long, powerful trends. If your stock had a strong run up during the long‐lasting 1990s bull market, that kind of price data can skew your results, magically making any trend‐following system appear profitable. Whether that success actually can be duplicated during a subsequent bull market, however, must first be thoroughly tested.\r\n<p class=\"article-tips tip\">If the majority of your profits come from a single trade or only a small number of trades, the system probably won’t perform well when you begin trading real money. You may want to address this problem by excluding periods from your test data when your stock was doing exceptionally well or when the results of any trades were significantly more profitable than the average trade.</p>\r\nThis technique is a valid approach to eliminating the extraordinary results arising from extraordinary situations in your historical data. Using it should give you a better idea of your system’s potential for generating real profits in the future.","description":"Many trend‐following trading systems use a moving average for their starting points. In this trend‐following example, the system is designed for position trading, which means you use a relatively long moving average. Short selling isn’t permitted with this simple system.\r\n\r\nThe first step is to define buy and sell rules for your initial testing. The actual code for defining these rules depends on your specific system‐development package. Therefore, trading rules are described as generally as possible. The rules for an initial test may look like this:\r\n<ul>\r\n \t<li>Buy at tomorrow’s opening price when today’s price crosses and closes above the 50‐day exponential moving average (EMA).</li>\r\n \t<li>Sell at tomorrow’s opening price when today’s price crosses and closes below the 50‐day EMA.</li>\r\n</ul>\r\nTo test whether using a moving average as a starting point is a good idea in a trend‐following system, apply these two rules to ten years of historical data for the stocks of your choice. After testing this idea, you find that this simple system works fairly well when stock prices are trending, but it’s likely to trigger many losing trades when the prices of stocks are range bound.\r\n\r\nYou can try to avoid these losing trades, and possibly improve your overall trading results, by filtering out trading‐range situations. One way to accomplish that goal is by changing the buy rule to read as follows: Buy at tomorrow’s open when the following conditions are true:\r\n<ul>\r\n \t<li>Today’s closing price is above the 50‐day EMA.</li>\r\n \t<li>The stock crossed above the 50‐day EMA sometime during the last 5 days.</li>\r\n \t<li>Today’s 50‐day EMA is greater than the 50‐day EMA from 5 days ago.</li>\r\n</ul>\r\nThese added conditions serve as signal confirmation. When you test these rules, you find they reduce the number of whipsaw trades for most stocks, but they’re also likely to delay buy and sell signals on profitable trades and thus usually result in smaller profits on those trades. However, this adjustment makes the overall system more profitable because the number of losses is reduced.\r\n\r\nYou can find out whether other changes that you can make in your simple system can actually improve profitability. You may, for example, test different types of moving averages. Try, for example, a simple moving average (SMA) instead of an exponential moving average (EMA). Or you may want to try using different time frames for your moving average, such as 9‐day, 25‐day, or 100‐day moving ­averages.\r\n<h2 id=\"tab1\" >Identifying system‐optimization pitfalls</h2>\r\nMost system‐development and testing software comes equipped with a provision for system optimization, which allows you to fine‐tune the technical analysis tools used in your trading system. You can, for example, tell the system to find the time frame of the moving average that produces the highest profit for one stock and then ask it to do the same thing for a different stock. Some systems enable you to test this factor simultaneously for many stocks.\r\n<p class=\"article-tips warning\">Although this approach is alluring, using it is likely to cause you trouble. If you find, for example, that a 22‐day moving average works best for one stock, a 37‐day moving average works best for the next stock, and another stock performs best using a 74‐day moving average, you’re going to run into problems. The set of circumstances leading to these optimized results won’t likely repeat in precisely the same way again in the future. It’s almost guaranteed that whatever optimized parameters you may find for these moving averages won’t be the optimal choices when trading real capital.</p>\r\nThis is a simple example of a problem that’s well known to scientists and economists who build mathematic models to forecast future events. It’s called <em>curve fitting</em> because you’re molding your model to fit the historical data. You can expend quite a bit of effort fine‐tuning a system to identify all the major trends and turning points in historical data for a particular stock, but that effort isn’t likely to result in future trading profits. In that case, your optimized system is more likely to cause a long string of losses rather than profits.\r\n<p class=\"article-tips remember\">Testing a long moving average and comparing the results to a short moving average is fine, and so is testing a few points in between a long moving average and a short moving average. As long as you use this exercise to understand why short moving averages work best for short‐term trades and why longer moving averages work better for traders with longer trading horizons, you’ll be fine. Otherwise, you’re probably moving into the realm of curve fitting and becoming frustrated with your actual trading results.</p>\r\n\r\n<h2 id=\"tab2\" >Testing with blind simulation</h2>\r\n<em>Blind simulation</em> is a method for setting aside enough historical data so you can test your system‐optimization results and avoid the problem of curve fitting. For example, you may test data from 1990 through 1999 and thus exclude data from 2000 through the present. After you’ve developed a system that looks good enough for you to base your trades on, you can then test your system against the data that was excluded.\r\n\r\nIf the system performs as well with the excluded data as it did with the original test data, you may have a system worth trading. If it fails, you obviously need to rethink your system.\r\n\r\nAnother approach is choosing your historical data with extreme care. You can expect trend‐following systems like a moving‐average system to perform well during long, powerful trends. If your stock had a strong run up during the long‐lasting 1990s bull market, that kind of price data can skew your results, magically making any trend‐following system appear profitable. Whether that success actually can be duplicated during a subsequent bull market, however, must first be thoroughly tested.\r\n<p class=\"article-tips tip\">If the majority of your profits come from a single trade or only a small number of trades, the system probably won’t perform well when you begin trading real money. You may want to address this problem by excluding periods from your test data when your stock was doing exceptionally well or when the results of any trades were significantly more profitable than the average trade.</p>\r\nThis technique is a valid approach to eliminating the extraordinary results arising from extraordinary situations in your historical data. Using it should give you a better idea of your system’s potential for generating real profits in the future.","blurb":"","authors":[{"authorId":9240,"name":"Joe Duarte","slug":"joe-duarte","description":" <p><b>Dr. Joe Duarte</b> is a financial &#173;writer, private investor and trader, and former money manager/president of River Willow Capital Management. In addition to <i>Options Trading For Dummies</i>, he is the author of <i>Trading Futures For Dummies</i> and <i>Market Timing For Dummies</i>. Visit his website at joeduarteinthemoneyoptions.com</p> ","_links":{"self":"https://dummies-api.dummies.com/v2/authors/9240"}}],"primaryCategoryTaxonomy":{"categoryId":34290,"title":"Investment Vehicles","slug":"investment-vehicles","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34290"}},"secondaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"tertiaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"trendingArticles":null,"inThisArticle":[{"label":"Identifying system‐optimization pitfalls","target":"#tab1"},{"label":"Testing with blind simulation","target":"#tab2"}],"relatedArticles":{"fromBook":[{"articleId":245740,"title":"Understanding Countertrend Trading Systems","slug":"understanding-countertrend-trading-systems","categoryList":["technology","computers","macs","general-macs"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/245740"}},{"articleId":245737,"title":"Understanding Trend‐Following Trading Systems","slug":"understanding-trend%e2%80%90following-trading-systems","categoryList":["technology","computers","macs","general-macs"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/245737"}},{"articleId":245734,"title":"Understanding Mechanical Trading Systems","slug":"understanding-mechanical-trading-systems","categoryList":["technology","computers","macs","general-macs"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/245734"}},{"articleId":245731,"title":"The Risks of Trading Options and Futures","slug":"risks-trading-options-futures","categoryList":["technology","computers","macs","general-macs"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/245731"}},{"articleId":245728,"title":"Options for Getting Out of Options","slug":"options-getting-options","categoryList":["technology","computers","macs","general-macs"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/245728"}}],"fromCategory":[{"articleId":209450,"title":"Trading Options For Dummies Cheat Sheet","slug":"trading-options-for-dummies-cheat-sheet","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/209450"}},{"articleId":195878,"title":"Trading Order Types","slug":"trading-order-types","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/195878"}}]},"hasRelatedBookFromSearch":false,"relatedBook":{"bookId":282636,"slug":"trading-options-for-dummies","isbn":"9781119828303","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles"],"amazon":{"default":"https://www.amazon.com/gp/product/1119828309/ref=as_li_tl?ie=UTF8&tag=wiley01-20","ca":"https://www.amazon.ca/gp/product/1119828309/ref=as_li_tl?ie=UTF8&tag=wiley01-20","indigo_ca":"http://www.tkqlhce.com/click-9208661-13710633?url=https://www.chapters.indigo.ca/en-ca/books/product/1119828309-item.html&cjsku=978111945484","gb":"https://www.amazon.co.uk/gp/product/1119828309/ref=as_li_tl?ie=UTF8&tag=wiley01-20","de":"https://www.amazon.de/gp/product/1119828309/ref=as_li_tl?ie=UTF8&tag=wiley01-20"},"image":{"src":"https://www.dummies.com/wp-content/uploads/options-trading-for-dummies-4th-edition-cover-9781119828303-203x255.jpg","width":203,"height":255},"title":"Options Trading For Dummies","testBankPinActivationLink":"","bookOutOfPrint":true,"authorsInfo":"<p><b>Dr. <b data-author-id=\"9240\">Joe Duarte</b></b> is a financial &#173;writer, private investor and trader, and former money manager/president of River Willow Capital Management. In addition to <i>Options Trading For Dummies</i>, he is the author of <i>Trading Futures For Dummies</i> and <i>Market Timing For Dummies</i>. Visit his website at joeduarteinthemoneyoptions.com</p>","authors":[{"authorId":9240,"name":"Joe Duarte","slug":"joe-duarte","description":" <p><b>Dr. Joe Duarte</b> is a financial &#173;writer, private investor and trader, and former money manager/president of River Willow Capital Management. In addition to <i>Options Trading For Dummies</i>, he is the author of <i>Trading Futures For Dummies</i> and <i>Market Timing For Dummies</i>. Visit his website at joeduarteinthemoneyoptions.com</p> ","_links":{"self":"https://dummies-api.dummies.com/v2/authors/9240"}}],"_links":{"self":"https://dummies-api.dummies.com/v2/books/"}},"collections":[],"articleAds":{"footerAd":"<div class=\"du-ad-region row\" id=\"article_page_adhesion_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_adhesion_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;investment-vehicles&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781119828303&quot;]}]\" id=\"du-slot-62b36f856871c\"></div></div>","rightAd":"<div class=\"du-ad-region row\" id=\"article_page_right_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_right_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;investment-vehicles&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781119828303&quot;]}]\" id=\"du-slot-62b36f8568e72\"></div></div>"},"articleType":{"articleType":"Articles","articleList":null,"content":null,"videoInfo":{"videoId":null,"name":null,"accountId":null,"playerId":null,"thumbnailUrl":null,"description":null,"uploadDate":null}},"sponsorship":{"sponsorshipPage":false,"backgroundImage":{"src":null,"width":0,"height":0},"brandingLine":"","brandingLink":"","brandingLogo":{"src":null,"width":0,"height":0}},"primaryLearningPath":"Explore","lifeExpectancy":"Two years","lifeExpectancySetFrom":"2022-05-26T00:00:00+00:00","dummiesForKids":"no","sponsoredContent":"no","adInfo":"","adPairKey":[]},"status":"publish","visibility":"public","articleId":245715},{"headers":{"creationTime":"2016-03-27T16:57:40+00:00","modifiedTime":"2022-05-03T17:25:36+00:00","timestamp":"2022-06-22T19:37:40+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Personal Finance","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34273"},"slug":"personal-finance","categoryId":34273},{"name":"Investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34288"},"slug":"investing","categoryId":34288},{"name":"Investment Vehicles","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34290"},"slug":"investment-vehicles","categoryId":34290},{"name":"Stocks","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34298"},"slug":"stocks","categoryId":34298}],"title":"Candlestick Charting For Dummies Cheat Sheet","strippedTitle":"candlestick charting for dummies cheat sheet","slug":"candlestick-charting-for-dummies-cheat-sheet","canonicalUrl":"","seo":{"metaDescription":"Candlestick charts help you make smart stock investing decisions. Learn how to construct candlestick charts and analyze trends and patterns.","noIndex":0,"noFollow":0},"content":"Make smart trading decisions using candlestick charting. This cheat sheet shows you how to read the data that makes up a candlestick chart, figure out how to analyze a candlestick chart, and identify some common candlestick patterns.","description":"Make smart trading decisions using candlestick charting. This cheat sheet shows you how to read the data that makes up a candlestick chart, figure out how to analyze a candlestick chart, and identify some common candlestick patterns.","blurb":"","authors":[{"authorId":10522,"name":"Russell Rhoads","slug":"russell-rhoads","description":" <b>Russell Rhoads</b> is a trader and analyst for Peak Trading Group in Chicago. His career in trading and market analysis covers over 17 years. He has a BBA and MS in Finance from the University of Memphis and has done graduate level work in Financial Engineering at the Illinois Institute of Technology. Russell also holds the Chartered Financial Analyst designation.","_links":{"self":"https://dummies-api.dummies.com/v2/authors/10522"}}],"primaryCategoryTaxonomy":{"categoryId":34298,"title":"Stocks","slug":"stocks","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34298"}},"secondaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"tertiaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"trendingArticles":null,"inThisArticle":[],"relatedArticles":{"fromBook":[{"articleId":194520,"title":"Constructing a Candlestick Chart","slug":"constructing-a-candlestick-chart","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/194520"}},{"articleId":194496,"title":"Candlestick Chart Analysis and Trading Tips","slug":"candlestick-chart-analysis-and-trading-tips","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/194496"}},{"articleId":194495,"title":"Common Candlestick Patterns","slug":"common-candlestick-patterns","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/194495"}}],"fromCategory":[{"articleId":283116,"title":"10 Reasons Not to Invest in Marijuana Stocks","slug":"10-reasons-not-to-invest-in-marijuana-stocks","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/283116"}},{"articleId":283111,"title":"11 Criteria for Choosing a Cannabis Investment","slug":"11-criteria-for-choosing-a-cannabis-investment","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/283111"}},{"articleId":283105,"title":"Cannabis Investments: Risks Inherent in Momentum Investing","slug":"cannabis-investments-risks-inherent-in-momentum-investing","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/283105"}},{"articleId":283098,"title":"Investing in Cannabis: Spotting Opportunities to Buy or Sell","slug":"investing-in-cannabis-spotting-opportunities-to-buy-or-sell","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/283098"}},{"articleId":283089,"title":"Investing in Cannabis: The Bid-Ask Spread","slug":"investing-in-cannabis-the-bid-ask-spread","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/283089"}}]},"hasRelatedBookFromSearch":false,"relatedBook":{"bookId":282054,"slug":"candlestick-charting-for-dummies","isbn":"9781119869955","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"amazon":{"default":"https://www.amazon.com/gp/product/1119869951/ref=as_li_tl?ie=UTF8&tag=wiley01-20","ca":"https://www.amazon.ca/gp/product/1119869951/ref=as_li_tl?ie=UTF8&tag=wiley01-20","indigo_ca":"http://www.tkqlhce.com/click-9208661-13710633?url=https://www.chapters.indigo.ca/en-ca/books/product/1119869951-item.html&cjsku=978111945484","gb":"https://www.amazon.co.uk/gp/product/1119869951/ref=as_li_tl?ie=UTF8&tag=wiley01-20","de":"https://www.amazon.de/gp/product/1119869951/ref=as_li_tl?ie=UTF8&tag=wiley01-20"},"image":{"src":"https://www.dummies.com/wp-content/uploads/9781119869955-203x255.jpg","width":203,"height":255},"title":"Candlestick Charting For Dummies, 2nd Edition","testBankPinActivationLink":"","bookOutOfPrint":true,"authorsInfo":"<p><b><b data-author-id=\"10522\">Russell Rhoads</b></b> is a trader and analyst for Peak Trading Group in Chicago. His career in trading and market analysis covers over 17 years. He has a BBA and MS in Finance from the University of Memphis and has done graduate level work in Financial Engineering at the Illinois Institute of Technology. Russell also holds the Chartered Financial Analyst designation.</p>","authors":[{"authorId":10522,"name":"Russell Rhoads","slug":"russell-rhoads","description":" <b>Russell Rhoads</b> is a trader and analyst for Peak Trading Group in Chicago. His career in trading and market analysis covers over 17 years. He has a BBA and MS in Finance from the University of Memphis and has done graduate level work in Financial Engineering at the Illinois Institute of Technology. Russell also holds the Chartered Financial Analyst designation.","_links":{"self":"https://dummies-api.dummies.com/v2/authors/10522"}}],"_links":{"self":"https://dummies-api.dummies.com/v2/books/"}},"collections":[],"articleAds":{"footerAd":"<div class=\"du-ad-region row\" id=\"article_page_adhesion_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_adhesion_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;investment-vehicles&quot;,&quot;stocks&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781119869955&quot;]}]\" id=\"du-slot-62b36f847a688\"></div></div>","rightAd":"<div class=\"du-ad-region row\" id=\"article_page_right_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_right_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;investment-vehicles&quot;,&quot;stocks&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781119869955&quot;]}]\" id=\"du-slot-62b36f847aded\"></div></div>"},"articleType":{"articleType":"Cheat Sheet","articleList":[{"articleId":194520,"title":"Constructing a Candlestick Chart","slug":"constructing-a-candlestick-chart","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/194520"}},{"articleId":194496,"title":"Candlestick Chart Analysis and Trading Tips","slug":"candlestick-chart-analysis-and-trading-tips","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/194496"}},{"articleId":194495,"title":"Common Candlestick Patterns","slug":"common-candlestick-patterns","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/194495"}}],"content":[{"title":"Constructing a candlestick chart","thumb":null,"image":null,"content":"<p>Four pieces of data, gathered through the course of a security’s trading day, are used to create a candlestick chart: opening price, closing price, high, and low. The candle in a chart is white when the close for a day is higher than the open, and black when the close is lower than the open. The <i>wicks</i>, lines sticking out of either end of the candlestick, represent the range between the day’s high and low prices. The wick on top shows the day’s high, the wick on the bottom shows the day’s low.</p>\n<p><img loading=\"lazy\" src=\"https://www.dummies.com/wp-content/uploads/162563.image0.jpg\" alt=\"image0.jpg\" width=\"485\" height=\"400\" /></p>\n<p>Additional information is sometimes displayed with candlestick charts. Don’t be afraid to use it! The following types of information are commonly included on candlestick charts and can be very useful in your analysis:</p>\n<ul class=\"level-one\">\n<li>\n<p class=\"first-para\"><b>Volume:</b> The total number of shares or contracts trading during a time period.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Open interest:</b> The total number of open contracts on a futures product.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Moving averages:</b> Lines that represent the average closing price for a time period and a few periods in the past.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Technical indicators: </b>Statistics that can be displayed in a variety of ways on a chart.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Fundamental information:</b> Data that includes dividend dates, days of share splits, or even insider buying and selling!</p>\n</li>\n</ul>\n"},{"title":"Candlestick chart analysis and trading tips","thumb":null,"image":null,"content":"<p>If you’re examining or trading a candlestick pattern, keep these guidelines in mind before you decide what to do with your money, so you can make an informed decision:</p>\n<ul class=\"level-one\">\n<li>\n<p class=\"first-para\">Determine whether the market is trending up, trending down, or not trending at all.</p>\n</li>\n<li>\n<p class=\"first-para\">If you put on a trade, be prepared to identify the point at which you take a loss, especially when you’re trading against the trend.</p>\n</li>\n<li>\n<p class=\"first-para\">Try not to anticipate that a pattern is going to be created by trading before the formation is complete.</p>\n</li>\n<li>\n<p class=\"first-para\">Use technical indicators to complement patterns. Indicators help to confirm your opinion of the market trend.</p>\n</li>\n<li>\n<p class=\"first-para\">When putting real money into trading, don’t trade what you can’t afford to lose!</p>\n</li>\n</ul>\n"},{"title":"Common candlestick patterns","thumb":null,"image":null,"content":"<p>You can become more familiar with some common and dependable candlestick patterns by checking out the following figures. (Remember, they don’t represent every possible candlestick pattern.)</p>\n<h2>Bullish two-day trend reversal patterns</h2>\n<p>These charts are a few of the most common and reliable bullish two-day trend reversal patterns in an uptrend.</p>\n<p><img loading=\"lazy\" src=\"https://www.dummies.com/wp-content/uploads/162566.image0.jpg\" alt=\"image0.jpg\" width=\"535\" height=\"280\" /></p>\n<h2>Bullish two-day trend continuation patterns</h2>\n<p>These patterns are common and reliable examples of bullish two-day trend continuation patterns in an uptrend.</p>\n<p><img loading=\"lazy\" src=\"https://www.dummies.com/wp-content/uploads/162567.image1.jpg\" alt=\"image1.jpg\" width=\"396\" height=\"400\" /></p>\n<h2>Bearish two-day trend reversal patterns</h2>\n<p>These figures shows some of the most common and reliable types of bearish two-day trend reversal patterns in an uptrend.</p>\n<p><img loading=\"lazy\" src=\"https://www.dummies.com/wp-content/uploads/162568.image2.jpg\" alt=\"image2.jpg\" width=\"535\" height=\"325\" /></p>\n<h2>Bearish two-day trend continuation patterns</h2>\n<p>These reliable two-day trend continuation patterns may show up frequently as you look through your candlestick charts.</p>\n<p><img loading=\"lazy\" src=\"https://www.dummies.com/wp-content/uploads/162569.image3.jpg\" alt=\"image3.jpg\" width=\"402\" height=\"378\" /></p>\n<h2>Bullish three-day trend reversal patterns</h2>\n<p>Here are a couple common bullish three-day trend reversal patterns.</p>\n<p><img loading=\"lazy\" src=\"https://www.dummies.com/wp-content/uploads/162570.image4.jpg\" alt=\"image4.jpg\" width=\"397\" height=\"291\" /></p>\n<h2>Bullish three-day trend continuation patterns</h2>\n<p>These two patterns are common examples of bullish three-day trend continuation patterns.</p>\n<p><img loading=\"lazy\" src=\"https://www.dummies.com/wp-content/uploads/162571.image5.jpg\" alt=\"image5.jpg\" width=\"482\" height=\"346\" /></p>\n<h2>Bearish three-day trend reversal patterns</h2>\n<p>These are a couple of the most common bearish three-day trend reversal patterns.</p>\n<p><img loading=\"lazy\" src=\"https://www.dummies.com/wp-content/uploads/162572.image6.jpg\" alt=\"image6.jpg\" width=\"458\" height=\"309\" /></p>\n<h2>Bearish three-day trend continuation patterns</h2>\n<p>Here are two common examples of bearish three-day trend reversal patterns.</p>\n<p><img loading=\"lazy\" src=\"https://www.dummies.com/wp-content/uploads/162573.image7.jpg\" alt=\"image7.jpg\" width=\"388\" height=\"397\" /></p>\n"}],"videoInfo":{"videoId":null,"name":null,"accountId":null,"playerId":null,"thumbnailUrl":null,"description":null,"uploadDate":null}},"sponsorship":{"sponsorshipPage":false,"backgroundImage":{"src":null,"width":0,"height":0},"brandingLine":"","brandingLink":"","brandingLogo":{"src":null,"width":0,"height":0}},"primaryLearningPath":"Advance","lifeExpectancy":"Two years","lifeExpectancySetFrom":"2021-06-29T00:00:00+00:00","dummiesForKids":"no","sponsoredContent":"no","adInfo":"","adPairKey":[]},"status":"publish","visibility":"public","articleId":209309},{"headers":{"creationTime":"2016-03-27T16:53:59+00:00","modifiedTime":"2022-05-03T13:58:06+00:00","timestamp":"2022-06-22T19:37:40+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Personal Finance","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34273"},"slug":"personal-finance","categoryId":34273},{"name":"Investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34288"},"slug":"investing","categoryId":34288},{"name":"Investment Vehicles","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34290"},"slug":"investment-vehicles","categoryId":34290},{"name":"Commodities","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34292"},"slug":"commodities","categoryId":34292}],"title":"Commodities For Dummies Cheat Sheet","strippedTitle":"commodities for dummies cheat sheet","slug":"commodities-for-dummies-cheat-sheet","canonicalUrl":"","seo":{"metaDescription":"Learn some of the basics related to commodities investing, including the exchanges, regulatory entities, and about risk-adjusted returns.","noIndex":0,"noFollow":0},"content":"The major commodities exchanges trade specific commodities worldwide, and the main regulatory organizations provide information and enforce codes to protect commodities investors. When investing in commodities, use guidelines and advice from the experts to lower your risks.","description":"The major commodities exchanges trade specific commodities worldwide, and the main regulatory organizations provide information and enforce codes to protect commodities investors. When investing in commodities, use guidelines and advice from the experts to lower your risks.","blurb":"","authors":[{"authorId":9022,"name":"Amine Bouchentouf","slug":"amine-bouchentouf","description":" <b>Amine Bouchentouf</b> is a native Arabic, English, and French speaker born and raised in Casablanca, Morocco. He teaches Arabic and lectures about relations between America and the Arab world.","_links":{"self":"https://dummies-api.dummies.com/v2/authors/9022"}}],"primaryCategoryTaxonomy":{"categoryId":34292,"title":"Commodities","slug":"commodities","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34292"}},"secondaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"tertiaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"trendingArticles":null,"inThisArticle":[],"relatedArticles":{"fromBook":[{"articleId":187975,"title":"Matching Commodities with Commodity Exchanges","slug":"matching-commodities-with-commodity-exchanges","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","commodities"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/187975"}},{"articleId":187959,"title":"Growing Interest in Agricultural Commodities","slug":"growing-interest-in-agricultural-commodities","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","commodities"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/187959"}},{"articleId":187956,"title":"Generating Risk-Adjusted Returns","slug":"generating-risk-adjusted-returns","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","commodities"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/187956"}},{"articleId":187957,"title":"Commodities and Emerging Markets","slug":"commodities-and-emerging-markets","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","commodities"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/187957"}},{"articleId":187958,"title":"Consulting Investment Regulatory Organizations","slug":"consulting-investment-regulatory-organizations","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","commodities"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/187958"}}],"fromCategory":[{"articleId":207438,"title":"<b>Investing in Commodities For Dummies</b><b> Cheat Sheet</b>","slug":"investing-in-commodities-for-dummies-cheat-sheet","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","commodities"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/207438"}},{"articleId":198903,"title":"Understanding the Real Risks behind Commodities","slug":"understanding-the-real-risks-behind-commodities","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","commodities"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/198903"}},{"articleId":198342,"title":"Risks with Investing in Commodities","slug":"risks-with-investing-in-commodities","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","commodities"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/198342"}},{"articleId":198341,"title":"The Role of Commodity Exchanges in Investment Trading","slug":"the-role-of-commodity-exchanges-in-investment-trading","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","commodities"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/198341"}},{"articleId":198213,"title":"How Money Supply Affects Commodity Tendencies","slug":"how-money-supply-affects-commodity-tendencies","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","commodities"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/198213"}}]},"hasRelatedBookFromSearch":false,"relatedBook":{"bookId":282094,"slug":"commodities-for-dummies-2nd-edition","isbn":"9781118016879","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","commodities"],"amazon":{"default":"https://www.amazon.com/gp/product/1118016874/ref=as_li_tl?ie=UTF8&tag=wiley01-20","ca":"https://www.amazon.ca/gp/product/1118016874/ref=as_li_tl?ie=UTF8&tag=wiley01-20","indigo_ca":"http://www.tkqlhce.com/click-9208661-13710633?url=https://www.chapters.indigo.ca/en-ca/books/product/1118016874-item.html&cjsku=978111945484","gb":"https://www.amazon.co.uk/gp/product/1118016874/ref=as_li_tl?ie=UTF8&tag=wiley01-20","de":"https://www.amazon.de/gp/product/1118016874/ref=as_li_tl?ie=UTF8&tag=wiley01-20"},"image":{"src":"https://www.dummies.com/wp-content/uploads/commodities-for-dummies-2nd-edition-cover-9781118016879-202x255.jpg","width":202,"height":255},"title":"Commodities For Dummies","testBankPinActivationLink":"","bookOutOfPrint":false,"authorsInfo":"<b data-author-id=\"9022\">Amine Bouchentouf</b> is an internationally acclaimed author and market commentator. You can follow his market analysis at www.commodities-investors.com.","authors":[{"authorId":9022,"name":"Amine Bouchentouf","slug":"amine-bouchentouf","description":" <b>Amine Bouchentouf</b> is a native Arabic, English, and French speaker born and raised in Casablanca, Morocco. He teaches Arabic and lectures about relations between America and the Arab world.","_links":{"self":"https://dummies-api.dummies.com/v2/authors/9022"}}],"_links":{"self":"https://dummies-api.dummies.com/v2/books/"}},"collections":[],"articleAds":{"footerAd":"<div class=\"du-ad-region row\" id=\"article_page_adhesion_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_adhesion_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;investment-vehicles&quot;,&quot;commodities&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781118016879&quot;]}]\" id=\"du-slot-62b36f8463aba\"></div></div>","rightAd":"<div class=\"du-ad-region row\" id=\"article_page_right_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_right_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;investment-vehicles&quot;,&quot;commodities&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781118016879&quot;]}]\" id=\"du-slot-62b36f84641f2\"></div></div>"},"articleType":{"articleType":"Cheat Sheet","articleList":[{"articleId":187975,"title":"Matching Commodities with Commodity Exchanges","slug":"matching-commodities-with-commodity-exchanges","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","commodities"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/187975"}},{"articleId":187957,"title":"Commodities and Emerging Markets","slug":"commodities-and-emerging-markets","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","commodities"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/187957"}},{"articleId":187958,"title":"Consulting Investment Regulatory Organizations","slug":"consulting-investment-regulatory-organizations","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","commodities"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/187958"}},{"articleId":187959,"title":"Growing Interest in Agricultural Commodities","slug":"growing-interest-in-agricultural-commodities","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","commodities"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/187959"}},{"articleId":187956,"title":"Generating Risk-Adjusted Returns","slug":"generating-risk-adjusted-returns","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","commodities"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/187956"}}],"content":[{"title":"Matching commodities with commodity exchanges","thumb":null,"image":null,"content":"<p>The 20th century saw a proliferation of commodity exchanges around the world, with many based in the money centers of New York and Chicago.</p>\n<p>In the first decade of the 21st century, the industry experienced a major consolidation period — partly driven by electronic-based trading platforms — that dramatically reduced the number of players in the space and increased the product offerings of the remaining exchanges.</p>\n<p>Here are some of the important exchanges in today&#8217;s new environment:</p>\n<ul class=\"level-one\">\n<li>\n<p class=\"first-para\"><a href=\"http://www.cmegroup.com\" target=\"_blank\" rel=\"noopener\"><b>Chicago Mercantile Exchange (CME)</b></a><b>:</b> Crude oil, natural gas, ethanol; gold, silver, copper, platinum, palladium; corn, wheat, soybeans, live cattle, lean hogs</p>\n</li>\n<li>\n<p class=\"first-para\"><a href=\"http://www.theice.com\" target=\"_blank\" rel=\"noopener\"><b>Intercontinental Exchange (ICE)</b></a><b>:</b> Crude oil, gas oil, natural gas; cocoa, coffee, cotton, sugar</p>\n</li>\n<li>\n<p class=\"first-para\"><a href=\"http://www.shfe.com.cn/en/\" target=\"_blank\" rel=\"noopener\"><b>Shanghai Futures Exchange (SHFE)</b></a><b>:</b> Fuel oil; gold, copper, aluminum, zinc; rubber</p>\n</li>\n</ul>\n"},{"title":"Commodities and emerging markets","thumb":null,"image":null,"content":"<p>One of the driving forces behind the dynamic commodities markets are emerging markets, both from the demand side and also in terms of supply. Keep an eye on Brazil and China, two countries that tend to move markets.</p>\n<ul class=\"level-one\">\n<li>\n<p class=\"first-para\"><b>Brazil:</b> A powerhouse in the commodities markets, Brazil has been blessed with an abundance of natural resources. It&#8217;s one of the top agricultural countries in the world, with leading positions in coffee, cocoa, corn, wheat, eucalyptus, and sugar cane production. In energy, it has large reserves of crude oil in the offshore basins off the Atlantic Ocean. It also has sizable mining reserves with abundant iron ore resources. Since Brazil holds such a dominant position in the supply and production of key commodities, it&#8217;s important to monitor this country very closely.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>China:</b> China has been the miracle story of the beginning of the 21st century. Many analysts compare its rise to the emergence of the United States as an economic powerhouse in the late 19th and early 20th centuries. Home to more than 1.3 billion citizens, China is a truly gigantic market. In many instances, it has been the main driving force behind demand increases for important commodities, including steel, copper, wheat, and crude oil. As the Chinese economy continues to expand at eye-popping rates (averaging 9 percent annually during the first decade of the 21st century), expect it to push demand for commodities at even more important levels.</p>\n</li>\n</ul>\n"},{"title":"Consulting investment regulatory organizations","thumb":null,"image":null,"content":"<p>In the era after the 2008 Global Financial Crisis (GFC), the importance and responsibilities of market regulators have grown exponentially. The GFC exposed many deficiencies in the way markets and market participants operate, so frequently consulting with regulators has become a necessity for any risk-averse market participant.</p>\n<p>These organizations are some of the key regulatory bodies for commodities and other investments:</p>\n<ul class=\"level-one\">\n<li>\n<p class=\"first-para\"><a href=\"http://www.sec.gov\" target=\"_blank\" rel=\"noopener\">Securities and Exchange Commission (SEC)</a></p>\n</li>\n<li>\n<p class=\"first-para\"><a href=\"http://www.cftc.gov\" target=\"_blank\" rel=\"noopener\">Commodity Futures Trading Commission (CFTC)</a></p>\n</li>\n<li>\n<p class=\"first-para\"><a href=\"http://www.nfa.futures.org\" target=\"_blank\" rel=\"noopener\">National Futures Association (NFA)</a></p>\n</li>\n<li>\n<p class=\"first-para\"><a href=\"http://www.finra.org\" target=\"_blank\" rel=\"noopener\">Financial Industry Regulatory Authority (FINRA)</a></p>\n</li>\n</ul>\n"},{"title":"Agricultural commodities","thumb":null,"image":null,"content":"<p>The following are some important agricultural commodities, along with their corresponding exchanges:</p>\n<ul class=\"level-one\">\n<li>\n<p class=\"first-para\"><b>Grains/cereals:</b> Corn, oats, soybeans, wheat (Chicago Mercantile Exchange)</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Meat products:</b> Feeder cattle, lean hogs, live cattle, frozen pork bellies (Chicago Mercantile Exchange)</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Tropical products:</b> Coffee, cocoa, orange juice, sugar (Intercontinental Exchange)</p>\n</li>\n</ul>\n"},{"title":"Generating risk-adjusted returns","thumb":null,"image":null,"content":"<p>Investing is all about managing risk, and here are two ways to approach risk management: (1) According to uber-investor Warren Buffet, Rule #1 of investing: Never lose money. Rule #2 of investing: Never forget rule #1; (2) If you focus on protecting your downside, the upside will take care of itself.</p>\n<p>Here are a few key risk variables you should be monitoring constantly:</p>\n<ul class=\"level-one\">\n<li>\n<p class=\"first-para\"><b>Volatility:</b> Volatility is the way that investors measure price variation and fluctuation of a given security over time. The higher the variation, the more volatility. For example, if a security trades at $5 on Monday, $15 on Tuesday, and $7 on Wednesday, it&#8217;s exhibiting extreme volatility. If you&#8217;re a novice investor, you should trade these types of securities with extreme care.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Standard deviation:</b> Standard deviation is a statistical measure of the amount of volatility inherent in a security. The standard deviation formula is a complex one, but it&#8217;s extremely powerful and practical. With one number, you can determine just how volatile a security or asset is. The higher the standard deviation, the riskier the asset; conversely a low standard deviation number means the security is more stable from a pricing perspective. A stable Fortune 500 company tends to have a lower standard deviation than a startup tech company. Use this powerful metric to help make better trading decisions.</p>\n</li>\n</ul>\n"}],"videoInfo":{"videoId":null,"name":null,"accountId":null,"playerId":null,"thumbnailUrl":null,"description":null,"uploadDate":null}},"sponsorship":{"sponsorshipPage":false,"backgroundImage":{"src":null,"width":0,"height":0},"brandingLine":"","brandingLink":"","brandingLogo":{"src":null,"width":0,"height":0}},"primaryLearningPath":"Advance","lifeExpectancy":"One year","lifeExpectancySetFrom":"2022-05-03T00:00:00+00:00","dummiesForKids":"no","sponsoredContent":"no","adInfo":"","adPairKey":[]},"status":"publish","visibility":"public","articleId":208627},{"headers":{"creationTime":"2016-03-27T16:47:15+00:00","modifiedTime":"2022-05-02T18:18:27+00:00","timestamp":"2022-06-22T19:37:40+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Personal Finance","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34273"},"slug":"personal-finance","categoryId":34273},{"name":"Investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34288"},"slug":"investing","categoryId":34288},{"name":"General Investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34300"},"slug":"general-investing","categoryId":34300}],"title":"Dark Pools and High Frequency Trading For Dummies Cheat Sheet","strippedTitle":"dark pools and high frequency trading for dummies cheat sheet","slug":"dark-pools-and-high-frequency-trading-for-dummies-cheat-sheet","canonicalUrl":"","seo":{"metaDescription":"This Cheat Sheet provides a quick overview of dark pools and high frequency trading, including choosing a good broker, and much more.","noIndex":0,"noFollow":0},"content":"Dark pools and high frequency trading (HFT) are contentious subjects in financial markets. Billions of dollars are traded through dark pools, and HFT algorithms with just small, incremental price differences make billions of dollars. And it all can happen in milliseconds. Most importantly, dark pools and HFT are part of the current market environment. Anyone who’s invested in the markets needs to know what they’re involved with and what they’re up against.","description":"Dark pools and high frequency trading (HFT) are contentious subjects in financial markets. Billions of dollars are traded through dark pools, and HFT algorithms with just small, incremental price differences make billions of dollars. And it all can happen in milliseconds. Most importantly, dark pools and HFT are part of the current market environment. Anyone who’s invested in the markets needs to know what they’re involved with and what they’re up against.","blurb":"","authors":[{"authorId":9235,"name":"Jay Vaananen","slug":"jay-vaananen","description":" <p><b>Jay Vaananen</b> is a senior private banker with many years of experience advising clients in their investments across all asset classes. He is also a popular university lecturer and regular commentator in all matters regarding banking, finance and investing.</p>","_links":{"self":"https://dummies-api.dummies.com/v2/authors/9235"}}],"primaryCategoryTaxonomy":{"categoryId":34300,"title":"General Investing","slug":"general-investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34300"}},"secondaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"tertiaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"trendingArticles":null,"inThisArticle":[],"relatedArticles":{"fromBook":[{"articleId":144053,"title":"Realising the Importance of Speed in High Frequency Trading","slug":"realising-the-importance-of-speed-in-high-frequency-trading","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/144053"}},{"articleId":144049,"title":"Choosing a Broker Who Understands and Helps You Navigate Dark Pools","slug":"choosing-a-broker-who-understands-and-helps-you-navigate-dark-pools","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/144049"}},{"articleId":144050,"title":"Being Aware of the Risks of Dark Pools","slug":"being-aware-of-the-risks-of-dark-pools","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/144050"}},{"articleId":144051,"title":"The Basics of Automated Trading","slug":"the-basics-of-automated-trading","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/144051"}},{"articleId":144031,"title":"10 Things You Should Know about Dark Pools","slug":"10-things-you-need-to-know-about-dark-pools","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/144031"}}],"fromCategory":[{"articleId":287556,"title":"Options Trading For Dummies Cheat Sheet","slug":"options-trading-for-dummies-cheat-sheet","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/287556"}},{"articleId":285735,"title":"What Is ESG Investing?","slug":"what-is-esg-investing","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/285735"}},{"articleId":285761,"title":"Just When You Thought It Was Safe: Coronawashing","slug":"just-when-you-thought-it-was-safe-coronawashing","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/285761"}},{"articleId":273978,"title":"Investing For Canadians All-in-One For Dummies","slug":"investing-for-canadians-all-in-one-for-dummies","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/273978"}},{"articleId":265694,"title":"Online Investing: Get More with a Discount Broker","slug":"online-investing-get-more-with-a-discount-broker","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/265694"}}]},"hasRelatedBookFromSearch":false,"relatedBook":{"bookId":281564,"slug":"dark-pools-and-high-frequency-trading-for-dummies","isbn":"9781118879191","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"amazon":{"default":"https://www.amazon.com/gp/product/1118879198/ref=as_li_tl?ie=UTF8&tag=wiley01-20","ca":"https://www.amazon.ca/gp/product/1118879198/ref=as_li_tl?ie=UTF8&tag=wiley01-20","indigo_ca":"http://www.tkqlhce.com/click-9208661-13710633?url=https://www.chapters.indigo.ca/en-ca/books/product/1118879198-item.html&cjsku=978111945484","gb":"https://www.amazon.co.uk/gp/product/1118879198/ref=as_li_tl?ie=UTF8&tag=wiley01-20","de":"https://www.amazon.de/gp/product/1118879198/ref=as_li_tl?ie=UTF8&tag=wiley01-20"},"image":{"src":"https://www.dummies.com/wp-content/uploads/dark-pools-and-high-frequency-trading-for-dummies-cover-9781118879191-203x255.jpg","width":203,"height":255},"title":"Dark Pools and High Frequency Trading For Dummies","testBankPinActivationLink":"","bookOutOfPrint":false,"authorsInfo":"<p><b data-author-id=\"9235\">Jay Vaananen</b> is a senior private banker with many years of experience advising clients in their investments across all asset classes. He is also a popular university lecturer and regular commentator in all matters regarding banking, finance and investing.</p>","authors":[{"authorId":9235,"name":"Jay Vaananen","slug":"jay-vaananen","description":" <p><b>Jay Vaananen</b> is a senior private banker with many years of experience advising clients in their investments across all asset classes. He is also a popular university lecturer and regular commentator in all matters regarding banking, finance and investing.</p>","_links":{"self":"https://dummies-api.dummies.com/v2/authors/9235"}}],"_links":{"self":"https://dummies-api.dummies.com/v2/books/"}},"collections":[],"articleAds":{"footerAd":"<div class=\"du-ad-region row\" id=\"article_page_adhesion_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_adhesion_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;general-investing&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781118879191&quot;]}]\" id=\"du-slot-62b36f8444509\"></div></div>","rightAd":"<div class=\"du-ad-region row\" id=\"article_page_right_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_right_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;general-investing&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781118879191&quot;]}]\" id=\"du-slot-62b36f8444c59\"></div></div>"},"articleType":{"articleType":"Cheat Sheet","articleList":[{"articleId":144049,"title":"Choosing a Broker Who Understands and Helps You Navigate Dark Pools","slug":"choosing-a-broker-who-understands-and-helps-you-navigate-dark-pools","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/144049"}},{"articleId":144022,"title":"The Fundamentals of High Frequency Trading","slug":"the-fundamentals-of-high-frequency-trading","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/144022"}},{"articleId":144053,"title":"Realising the Importance of Speed in High Frequency Trading","slug":"realising-the-importance-of-speed-in-high-frequency-trading","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/144053"}}],"content":[{"title":"Choosing a broker who understands dark pools","thumb":null,"image":null,"content":"<p>If you&#8217;re buying or selling shares then you&#8217;ll inevitably be routed through a dark pool at some point and your trades may well be executed there. Your broker&#8217;s expertise and the services that he provides are now one of the most important parts of your investment process.</p>\n<p class=\"Tip\">Figure out what you want to do with your investments and what type of relationship you need with a broker. Deciding on a broker depends on how hands-on you want to be and how much control you want to have over your orders. If you just want to push the button and execute your order then you need a broker you can trust.</p>\n<p>If, on the other hand, you prefer to do things yourself then you need a broker who offers you as much control and decision making as possible when it comes to the execution of your trade.</p>\n<p>When you talk with your broker, ask him these questions to ensure that he&#8217;s working for your best interests:</p>\n<ul class=\"level-one\">\n<li>\n<p class=\"first-para\"><b>Do you know the different dark pools?</b> Your broker should know the main dark pools. This question will tell you whether your broker is up to speed on the current market and has an understanding of who the major operators are. Stock trades are regularly routed through dark pools; if a broker hasn&#8217;t got any idea about dark pools, it&#8217;s a sign of incompetence.</p>\n<p class=\"child-para Tip\">After asking your broker what he knows about the different dark pools, you can also do your own investigation. Know the biggest dark pools by name. Read recent news reports about them and find out how they execute their orders and who they allow to operate in their pools. Don&#8217;t just believe their web pages and marketing materials. There have been lawsuits accusing dark pools of misleading clients, so make sure that you know the good guys from the bad guys.</p>\n<p class=\"child-para Remember\">The good guys can become the bad guys overnight, so regularly follow any developments in the dark pool market via the media. If a dark pool operator is fined or is under investigation for offences that have negatively impacted its clients, you should discuss the matter with your broker and make sure that he doesn&#8217;t route your trades through that particular dark pool until the issue with the dark pool is resolved.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>What markets do you trade in? </b>Discuss with your broker what dark pools and what displayed markets he executes your trades on. Don&#8217;t be afraid to ask straight and difficult questions and see what your broker says. If he can&#8217;t give you clear answers then the broker serving you either doesn&#8217;t know his job well enough or is hiding something from you.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Does the dark pool operate a maker-taker fee?</b> A <i>maker-taker fee</i> is when some traders (often high frequency traders) are paid a fee to post orders on the book, which adds liquidity (maker fee), or to trade against existing orders in the book, which takes away liquidity (taker fee). If the dark pools your broker uses operate a maker-taker fee then high frequency traders are likely to be operating in that dark pool. Exchanges make money when trades are executed; that&#8217;s why sometimes they offer financial incentives to certain traders to either post orders or to execute against existing orders already in the order book.</p>\n<p class=\"child-para\">If you&#8217;re dealing in small share lots then it may be fine for you to use the standard at-market orders, because they&#8217;re unlikely to have an impact on the price. If you&#8217;re trading large sizes then you may be better off trading in another dark pool because the chances are high that a high-frequency-trading algorithm will discover your larger order and trade against it.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Do you offer direct market access?</b> <i>Direct market access</i> means the ability to enter your orders directly into a market venue without having to go through a broker or intermediary. If you want to operate your trades yourself, you need direct market access. This gives you a choice of how and where to route your orders.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>What special order types do you have access to?</b> If you manage your own orders then you&#8217;ll need to know all the different special order types available and know exactly how they work in the market. Don&#8217;t just take your broker&#8217;s word; make sure that you research the different types of special order types and cross-reference with what your broker tells you.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>What is your trading portal? </b>A <i>trading portal</i> is what you have in front of you on your computer screen to enter and follow your trades.<b> </b>Get to know the trading tools at your disposal and test to see how they work. Check to see whether the broker&#8217;s trading portal is intuitive and easy to use.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Will you answer my dark pool queries in writing?</b> Don&#8217;t be afraid to ask your broker for confirmation in writing on any issues you have with how he operates in dark pools and routes trades. Getting everything in writing is important because it gives you proof that you&#8217;ve discussed the matter of dark pools with your broker and made demands on the broker as to how he should act with your orders when dark pools are involved in one of your trades. If a situation arises in which a dark pool has acted unfairly to certain market participants (as has happened before) then you at least have the possibility of redress.</p>\n</li>\n</ul>\n"},{"title":"Fundamentals of high frequency trading","thumb":null,"image":null,"content":"<p>Having a grasp of the fundamental traits of a high frequency trade helps you spot where the high frequency traders are operating and what tactics they&#8217;re using.</p>\n<p>The more knowledge you have of the tactics and trading strategies used by high frequency traders, the better equipped you will be to avoid becoming their prey and receiving poor trade executions. Here are some suggestions:</p>\n<ul class=\"level-one\">\n<li>\n<p class=\"first-para\"><b>High frequency traders trade in small lots of 100 to 200 shares.</b> They try to find out big orders hidden in the markets by using small orders to test the market.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Watch for stock price slippage.</b> <i>Slippage</i><i> </i>is the difference between the price of a stock when you send an order into the market and the price your order actually gets executed at. Consistently seeing slippage in your trades is indicative of high frequency traders operating in that stock. Be careful: you don&#8217;t want to be fodder for high frequency traders.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Flash crashes can often be traced back to high frequency traders</b>. Flash crashes happen fast. At their longest, a flash crash may take minutes; more often they are just seconds or milliseconds in length. Because of the speed at which a flash crash happens, it often involves high frequency traders pulling their orders out of the market and/or placing a large amount of sell orders. If the stock has had flash crashes then the order book may be the realm of high frequency traders.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>High frequency traders operate in dark pools. </b>Be aware that high frequency traders have been allowed into some dark pools. The fact that there may be high frequency traders in a dark pool makes it impossible for you to spot whether you&#8217;re trading against them. In such a situation, you&#8217;re at risk of receiving an execution at an inferior price.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>High frequency traders use many different strategies.</b> High frequency traders employ traditional market-making and trading strategies; contrary to popular belief, not all high frequency trading is predatory.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>High frequency trading follows regulatory changes.</b> Laws and regulations are the foundation of how high frequency traders are able to ply their trade. Any changes in regulation will affect how the market works.</p>\n</li>\n</ul>\n"},{"title":"Realizing the importance of speed in HFT","thumb":null,"image":null,"content":"<p>High frequency trading requires speed quicker than the eye can see. With superior speeds, high frequency traders are able to react to news faster than market participants with inferior speed, because computer algorithms are able to analyse and produce trading instructions faster than a human can manually input an order. These are some of the ways they achieve these superfast speeds:</p>\n<ul class=\"level-one\">\n<li>\n<p class=\"first-para\"><b>Co-location is at the heart of HFT speed.</b> <i>Co-location</i> basically means placing a high frequency trader&#8217;s computers as close as physically possible to the exchange&#8217;s trade-matching computers. Doing so reduces the time it takes for the HFT trader&#8217;s computers to receive important market information. By placing their computers as close as possible to an exchange&#8217;s matching engine, high frequency traders are able to have faster access to changes in price and the order book.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>News service providers get a look at important economic data prior to the official release.</b> They then place the news in servers close to the exchanges so that when the news is released, it&#8217;s available in different geographical locations at exactly the same time. High frequency traders with their computers located close to the news servers will be at an advantage because they can get the released news more quickly and then trade on the news faster than other market participants.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Routing via a dark pool exposes you to the possibility of being front run and of information leakage. </b>When an order is first routed through a dark pool or even several dark pools, it&#8217;s leaking information all the time. The type of order, the price information and the amount of stocks in the order are all valuable information to other traders. This information is being sent electronically and is therefore at risk of being picked up or even given to other market participants, which is why it&#8217;s called <i>information leakage.</i> Make sure that it&#8217;s a dark pool you&#8217;re happy to have your orders go through.</p>\n</li>\n</ul>\n"}],"videoInfo":{"videoId":null,"name":null,"accountId":null,"playerId":null,"thumbnailUrl":null,"description":null,"uploadDate":null}},"sponsorship":{"sponsorshipPage":false,"backgroundImage":{"src":null,"width":0,"height":0},"brandingLine":"","brandingLink":"","brandingLogo":{"src":null,"width":0,"height":0}},"primaryLearningPath":"Advance","lifeExpectancy":"Two years","lifeExpectancySetFrom":"2022-05-02T00:00:00+00:00","dummiesForKids":"no","sponsoredContent":"no","adInfo":"","adPairKey":[]},"status":"publish","visibility":"public","articleId":207527},{"headers":{"creationTime":"2016-03-27T16:47:55+00:00","modifiedTime":"2022-04-26T18:13:09+00:00","timestamp":"2022-06-22T19:37:39+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Personal Finance","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34273"},"slug":"personal-finance","categoryId":34273},{"name":"Investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34288"},"slug":"investing","categoryId":34288},{"name":"Investment Vehicles","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34290"},"slug":"investment-vehicles","categoryId":34290},{"name":"Stocks","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34298"},"slug":"stocks","categoryId":34298}],"title":"Trend Trading For Dummies Cheat Sheet","strippedTitle":"trend trading for dummies cheat sheet","slug":"trend-trading-for-dummies-cheat-sheet","canonicalUrl":"","seo":{"metaDescription":"Learn the basics of trend trading, including why it's so effective, other factors to keep in mind, and how to manage your risk.","noIndex":0,"noFollow":0},"content":"The practicality of trend trading is that you're waiting for the market to \"show its hand\" by establishing a clear direction and then jumping onboard for the ride.\r\n\r\nThis handy Cheat Sheet provides an overview of how to follow the big-money market players to the glorious land of profitability. Get tips on why trend trading works so well, how to determine a trend that will continue after you enter the market, and how to manage your risk once you're in a trade.","description":"The practicality of trend trading is that you're waiting for the market to \"show its hand\" by establishing a clear direction and then jumping onboard for the ride.\r\n\r\nThis handy Cheat Sheet provides an overview of how to follow the big-money market players to the glorious land of profitability. Get tips on why trend trading works so well, how to determine a trend that will continue after you enter the market, and how to manage your risk once you're in a trade.","blurb":"","authors":[{"authorId":9347,"name":"Barry Burns","slug":"barry-burns","description":" <p><b>Dr. Barry Burns</b> is the founder of TopDogTrading.com, which he created to help students shorten their learning curve in becoming professional traders. He was also the lead moderator for the FuturesTalk.net chat room, has written numerous articles, and has been featured in several books and online trading radio interviews.</p>","_links":{"self":"https://dummies-api.dummies.com/v2/authors/9347"}}],"primaryCategoryTaxonomy":{"categoryId":34298,"title":"Stocks","slug":"stocks","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34298"}},"secondaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"tertiaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"trendingArticles":null,"inThisArticle":[],"relatedArticles":{"fromBook":[{"articleId":203480,"title":"3 Ways to Use the Momentum Indicator","slug":"3-ways-to-use-the-momentum-indicator","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/203480"}},{"articleId":149823,"title":"Why Trend Trading Is So Effective","slug":"why-trend-trading-is-so-effective","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/149823"}},{"articleId":149811,"title":"Managing Your Risk","slug":"managing-your-risk","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/149811"}},{"articleId":149810,"title":"Understand the Other \"Energies\" You Need to Trend Trade Profitably","slug":"understand-the-other-energies-you-need-to-trend-trade-profitably","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/149810"}},{"articleId":149799,"title":"The Holy Grail of Trading Success","slug":"the-holy-grail-of-trading-success","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/149799"}}],"fromCategory":[{"articleId":283116,"title":"10 Reasons Not to Invest in Marijuana Stocks","slug":"10-reasons-not-to-invest-in-marijuana-stocks","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/283116"}},{"articleId":283111,"title":"11 Criteria for Choosing a Cannabis Investment","slug":"11-criteria-for-choosing-a-cannabis-investment","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/283111"}},{"articleId":283105,"title":"Cannabis Investments: Risks Inherent in Momentum Investing","slug":"cannabis-investments-risks-inherent-in-momentum-investing","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/283105"}},{"articleId":283098,"title":"Investing in Cannabis: Spotting Opportunities to Buy or Sell","slug":"investing-in-cannabis-spotting-opportunities-to-buy-or-sell","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/283098"}},{"articleId":283089,"title":"Investing in Cannabis: The Bid-Ask Spread","slug":"investing-in-cannabis-the-bid-ask-spread","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/283089"}}]},"hasRelatedBookFromSearch":false,"relatedBook":{"bookId":282638,"slug":"trend-trading-for-dummies","isbn":"9781118871287","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"amazon":{"default":"https://www.amazon.com/gp/product/1118871286/ref=as_li_tl?ie=UTF8&tag=wiley01-20","ca":"https://www.amazon.ca/gp/product/1118871286/ref=as_li_tl?ie=UTF8&tag=wiley01-20","indigo_ca":"http://www.tkqlhce.com/click-9208661-13710633?url=https://www.chapters.indigo.ca/en-ca/books/product/1118871286-item.html&cjsku=978111945484","gb":"https://www.amazon.co.uk/gp/product/1118871286/ref=as_li_tl?ie=UTF8&tag=wiley01-20","de":"https://www.amazon.de/gp/product/1118871286/ref=as_li_tl?ie=UTF8&tag=wiley01-20"},"image":{"src":"https://www.dummies.com/wp-content/uploads/trend-trading-for-dummies-cover-9781118871287-203x255.jpg","width":203,"height":255},"title":"Trend Trading For Dummies","testBankPinActivationLink":"","bookOutOfPrint":false,"authorsInfo":"<p><b data-author-id=\"9347\">Dr. Barry Burns</b> is the founder of TopDogTrading.com, which he created to help students shorten their learning curve in becoming professional traders. He was also the lead moderator for the FuturesTalk.net chat room, has written numerous articles, and has been featured in several books and online trading radio interviews.</p>","authors":[{"authorId":9347,"name":"Barry Burns","slug":"barry-burns","description":" <p><b>Dr. Barry Burns</b> is the founder of TopDogTrading.com, which he created to help students shorten their learning curve in becoming professional traders. He was also the lead moderator for the FuturesTalk.net chat room, has written numerous articles, and has been featured in several books and online trading radio interviews.</p>","_links":{"self":"https://dummies-api.dummies.com/v2/authors/9347"}}],"_links":{"self":"https://dummies-api.dummies.com/v2/books/"}},"collections":[],"articleAds":{"footerAd":"<div class=\"du-ad-region row\" id=\"article_page_adhesion_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_adhesion_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;investment-vehicles&quot;,&quot;stocks&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781118871287&quot;]}]\" id=\"du-slot-62b36f8339166\"></div></div>","rightAd":"<div class=\"du-ad-region row\" id=\"article_page_right_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_right_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;investment-vehicles&quot;,&quot;stocks&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781118871287&quot;]}]\" id=\"du-slot-62b36f83398a8\"></div></div>"},"articleType":{"articleType":"Cheat Sheet","articleList":[{"articleId":149823,"title":"Why Trend Trading Is So Effective","slug":"why-trend-trading-is-so-effective","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/149823"}},{"articleId":149810,"title":"Understand the Other \"Energies\" You Need to Trend Trade Profitably","slug":"understand-the-other-energies-you-need-to-trend-trade-profitably","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/149810"}},{"articleId":149811,"title":"Managing Your Risk","slug":"managing-your-risk","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/149811"}}],"content":[{"title":"Why trend trading is so effective","thumb":null,"image":null,"content":"<p>Trend trading is a common and long-standing approach to trading for good reason: It works! Following, are some reasons why, so you don&#8217;t have to blindly accept the premise — and also because understanding why can give you the confident mindset required for successful trading.</p>\n<ul class=\"level-one\">\n<li>\n<p class=\"first-para\"><b>The &#8220;whales&#8221; control the market. </b>The markets are priced-based on an auction model of bids and asks and buyers and sellers, so logically the big fish in the sea (the market participants with the big money — pension plans, mutual funds, banks, hedge funds, insurance companies, and other institutions) create the big moves in the market. This isn&#8217;t implying that they&#8217;re doing anything illegal; it&#8217;s simply a matter that large amounts of money invested in the markets cause them to move. If one market participant has a lot of money, it may be able to move the market by itself. As a group, the big-money players have even more market-moving power.</p>\n<p class=\"child-para\">Trend trading (also known as trend following) is one of the easiest and most reliable ways to make money in the markets because you&#8217;re following the leaders (sometimes called &#8220;the smart money&#8221;).</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Trend trading is one of the simplest approaches to trading.</b> The world of trading has become increasingly complex, causing many traders to suffer from information overload. From an endless number of trading systems, indicators, automated computer trading programs, and trading theories (with more being created every day), new traders often feel the need to study everything available. As a result, they become overwhelmed and confused.</p>\n<p class=\"child-para\">Trend trading is a simple approach to the markets that doesn&#8217;t require a lot of fancy technology or an intimate knowledge of mathematics, geometry, or market theory. Therefore, trend trading is one of the simplest approaches to trading.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Trend trading has stood the test of time.</b> Documentation of trend trading dates back to the 19th and 20th centuries, and it continues to be popular to this day. One of the most famous trading experiments ever conducted, gathering a group of students with no trading experience in an attempt to turn them into successful traders (the &#8220;Turtle Traders&#8221;), was used with a trend following approach.</p>\n</li>\n</ul>\n"},{"title":"The other 'energies' you need to trend trade profitably","thumb":null,"image":null,"content":"<p>As good as trend trading is, trend shouldn&#8217;t be the only factor in considering whether or not to take a trade. Other factors must be added to it to provide enough variables to create a probability scenario that puts the odds on your side.</p>\n<ul class=\"level-one\">\n<li>\n<p class=\"first-para\"><b>Trading in the direction of the trend (the dominant direction of the market) is a great place to start.</b> Determining the direction of the market at any given time is easy. The more important question for a trader is, &#8220;Will the market continue in that direction after I enter the market?&#8221;</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Knowing the strength of the trend will help you determine the probability of the market continuing to move in the direction of the trend after you enter your trade.</b> Use an indicator that measures momentum to determine whether the trend is strong or weak before you take a position in the market.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Determining the time to enter your trend trade is critical</b>. If you get in too early, the market may experience a steep correction against your position before the trend continues. If you enter too late, the trend may be coming to an end. Use a cycle indicator and wave counts to determine the ideal time to enter the trend.</p>\n</li>\n</ul>\n"},{"title":"Managing your risk","thumb":null,"image":null,"content":"<p>All types of trading are risky, including trend trading. No matter what type of trading you do, not employing risk-management techniques in your trading is fiscally irresponsible. Here are few techniques to get you started managing risk:</p>\n<ul class=\"level-one\">\n<li>\n<p class=\"first-para\"><b>Manage leverage responsibly</b>. Leverage is a two-edged sword. It can help you make money faster, but it can also cause you to lose money faster. Consult with your broker regarding the amount of leverage made available to you to help you decide whether you should use leverage. Be conservative in your decision.</p>\n<p class=\"child-para\">Don&#8217;t risk more money than you can afford to lose without disrupting your overall financial life plan.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Practice diversification</b>. Trading various uncorrelated markets concurrently can help dilute the risk of having all your money committed to one financial vehicle.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Consider hedging your positions with options and/or futures. </b>These highly leveraged tools can help offset the risk of your primary position with a relatively small amount of money. It&#8217;s similar to buying insurance.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Utilize effective money-management techniques</b>. Use protective stops to help limit the amount of loss you&#8217;ll accept on every trade. <b>Note: </b>You shouldn&#8217;t use protective stops only for each trade but also to limit the amount of money you&#8217;re willing to lose in a given day, week, month, quarter, and year.</p>\n</li>\n</ul>\n"}],"videoInfo":{"videoId":null,"name":null,"accountId":null,"playerId":null,"thumbnailUrl":null,"description":null,"uploadDate":null}},"sponsorship":{"sponsorshipPage":false,"backgroundImage":{"src":null,"width":0,"height":0},"brandingLine":"","brandingLink":"","brandingLogo":{"src":null,"width":0,"height":0}},"primaryLearningPath":"Advance","lifeExpectancy":"One year","lifeExpectancySetFrom":"2022-04-26T00:00:00+00:00","dummiesForKids":"no","sponsoredContent":"no","adInfo":"","adPairKey":[]},"status":"publish","visibility":"public","articleId":207654},{"headers":{"creationTime":"2016-03-27T16:46:49+00:00","modifiedTime":"2022-04-06T18:32:13+00:00","timestamp":"2022-06-22T19:37:34+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Personal Finance","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34273"},"slug":"personal-finance","categoryId":34273},{"name":"Investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34288"},"slug":"investing","categoryId":34288},{"name":"General Investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34300"},"slug":"general-investing","categoryId":34300}],"title":"High-Level Investing For Dummies Cheat Sheet","strippedTitle":"high-level investing for dummies cheat sheet","slug":"high-level-investing-for-dummies-cheat-sheet","canonicalUrl":"","seo":{"metaDescription":"Check out the following sites, tools, and pointers to stay informed about major markets and global issues that affect stocks.","noIndex":0,"noFollow":0},"content":"In high-level investing, investors and speculators track the major markets and critical global issues that affect stocks and other securities, both in the United States and other major markets. Check out the following sites, tools, and pointers to stay informed.","description":"In high-level investing, investors and speculators track the major markets and critical global issues that affect stocks and other securities, both in the United States and other major markets. Check out the following sites, tools, and pointers to stay informed.","blurb":"","authors":[{"authorId":9001,"name":"Paul Mladjenovic","slug":"paul-mladjenovic","description":" <p><b>Paul Mladjenovic</b> is a renowned certified financial planner and investing consultant. He has authored six editions of the bestselling <i>Stock Investing For Dummies</i> and is frequently interviewed by media outlets including MarketWatch, Kitco, OANN, and more. ","_links":{"self":"https://dummies-api.dummies.com/v2/authors/9001"}}],"primaryCategoryTaxonomy":{"categoryId":34300,"title":"General Investing","slug":"general-investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34300"}},"secondaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"tertiaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"trendingArticles":null,"inThisArticle":[],"relatedArticles":{"fromBook":[{"articleId":139949,"title":"10 Respected Authorities on Stocks and Related Investments","slug":"10-respected-authorities-on-stocks-and-related-investments","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/139949"}},{"articleId":139944,"title":"Is the Market Overvalued? Using the Buffett Indicator","slug":"is-the-market-overvalued-using-the-buffett-indicator","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/139944"}},{"articleId":139943,"title":"An Option Strategy for a Turbulent Market: The Zero-Cost Collar","slug":"an-option-strategy-for-a-turbulent-market-the-zero-cost-collar","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/139943"}},{"articleId":139939,"title":"7 Practices of Successful Options Speculators","slug":"7-practices-of-successful-options-speculators","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/139939"}},{"articleId":139940,"title":"4 Great Simulated Stock-Trading Sites for High-Level Investors","slug":"4-great-simulated-stock-trading-sites-for-high-level-investors","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/139940"}}],"fromCategory":[{"articleId":287556,"title":"Options Trading For Dummies Cheat Sheet","slug":"options-trading-for-dummies-cheat-sheet","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/287556"}},{"articleId":285735,"title":"What Is ESG Investing?","slug":"what-is-esg-investing","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/285735"}},{"articleId":285761,"title":"Just When You Thought It Was Safe: Coronawashing","slug":"just-when-you-thought-it-was-safe-coronawashing","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/285761"}},{"articleId":273978,"title":"Investing For Canadians All-in-One For Dummies","slug":"investing-for-canadians-all-in-one-for-dummies","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/273978"}},{"articleId":265694,"title":"Online Investing: Get More with a Discount Broker","slug":"online-investing-get-more-with-a-discount-broker","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/265694"}}]},"hasRelatedBookFromSearch":false,"relatedBook":{"bookId":282274,"slug":"high-level-investing-for-dummies","isbn":"9781119140818","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"amazon":{"default":"https://www.amazon.com/gp/product/1119140811/ref=as_li_tl?ie=UTF8&tag=wiley01-20","ca":"https://www.amazon.ca/gp/product/1119140811/ref=as_li_tl?ie=UTF8&tag=wiley01-20","indigo_ca":"http://www.tkqlhce.com/click-9208661-13710633?url=https://www.chapters.indigo.ca/en-ca/books/product/1119140811-item.html&cjsku=978111945484","gb":"https://www.amazon.co.uk/gp/product/1119140811/ref=as_li_tl?ie=UTF8&tag=wiley01-20","de":"https://www.amazon.de/gp/product/1119140811/ref=as_li_tl?ie=UTF8&tag=wiley01-20"},"image":{"src":"https://www.dummies.com/wp-content/uploads/high-level-investing-for-dummies-cover-9781119140818-203x255.jpg","width":203,"height":255},"title":"High Level Investing For Dummies","testBankPinActivationLink":"","bookOutOfPrint":false,"authorsInfo":"<p><b data-author-id=\"9001\">Paul Mladjenovic, CFP,</b> has written four editions of <i>Stock Investing For Dummies</i> and has taught would-be investors about stock investing since 1983. As a certified financial planner, he personally coaches his clients on stock investing strategies. </p>","authors":[{"authorId":9001,"name":"Paul Mladjenovic","slug":"paul-mladjenovic","description":" <p><b>Paul Mladjenovic</b> is a renowned certified financial planner and investing consultant. He has authored six editions of the bestselling <i>Stock Investing For Dummies</i> and is frequently interviewed by media outlets including MarketWatch, Kitco, OANN, and more. ","_links":{"self":"https://dummies-api.dummies.com/v2/authors/9001"}}],"_links":{"self":"https://dummies-api.dummies.com/v2/books/"}},"collections":[],"articleAds":{"footerAd":"<div class=\"du-ad-region row\" id=\"article_page_adhesion_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_adhesion_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;general-investing&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781119140818&quot;]}]\" id=\"du-slot-62b36f7e8e1db\"></div></div>","rightAd":"<div class=\"du-ad-region row\" id=\"article_page_right_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_right_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;general-investing&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781119140818&quot;]}]\" id=\"du-slot-62b36f7e8e91e\"></div></div>"},"articleType":{"articleType":"Cheat Sheet","articleList":[{"articleId":139936,"title":"Intermarket Sites That Are Useful for High-Level Investing","slug":"intermarket-sites-that-are-useful-for-high-level-investing","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/139936"}},{"articleId":139939,"title":"7 Practices of Successful Options Speculators","slug":"7-practices-of-successful-options-speculators","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/139939"}},{"articleId":139940,"title":"4 Great Simulated Stock-Trading Sites for High-Level Investors","slug":"4-great-simulated-stock-trading-sites-for-high-level-investors","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/139940"}},{"articleId":139932,"title":"Recommended Apps for High-Level Stock Investing","slug":"recommended-apps-for-high-level-stock-investing","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/139932"}}],"content":[{"title":"Intermarket sites that are useful for high-level investing","thumb":null,"image":null,"content":"<p>Stocks can go up or down based on major movements in related markets. These sites track other major markets that can (or will) have a major impact on today&#8217;s stock market (and possibly your high-level investing pursuits):</p>\n<ul class=\"level-one\">\n<li>\n<p class=\"first-para\"><a href=\"http://www.pensiontsunami.com\" target=\"_blank\" rel=\"noopener\"><b>PensionTsunami</b></a><b>:</b> Pensions are massively underfunded across the corporate and government world; this site gives you all the news and analysis on this critical topic.</p>\n</li>\n<li>\n<p class=\"first-para\"><a href=\"../theeconomiccollapseblog.com\" target=\"_blank\" rel=\"noopener\"><b>Economic Collapse Blog</b></a><b>:</b> Michael Snyder&#8217;s site provides thorough research on major financial and economic issues that could be problematic for the U.S. economy.</p>\n</li>\n<li>\n<p class=\"first-para\"><a href=\"http://www.thebubblebubble.com\" target=\"_blank\" rel=\"noopener\"><b>The Bubble Bubble</b></a><b>:</b> This site follows all of the potential bubbles that could burst in the next few years.</p>\n</li>\n<li>\n<p class=\"first-para\"><a href=\"http://www.kereport.com\" target=\"_blank\" rel=\"noopener\"><b>The Korelin Economics Report</b></a><b>:</b> This site provides news, commentary, and interviews with analysts on precious metals, stocks, and related topics.</p>\n</li>\n<li>\n<p class=\"first-para\"><a href=\"http://www.dollarcollapse.com\" target=\"_blank\" rel=\"noopener\"><b>Dollar Collapse</b></a><b>:</b> John Rubino&#8217;s site tracks the U.S. dollar, currencies, and related markets.</p>\n</li>\n</ul>\n"},{"title":"7 practices of successful options speculators","thumb":null,"image":null,"content":"<p>Option strategies augment any high-level investor&#8217;s or speculator&#8217;s overall approach. If you do option strategies of any kind, the following practices will help you get ahead:</p>\n<ul class=\"level-one\">\n<li>\n<p class=\"first-para\"><b>Discipline:</b> Successful options speculators make sure they aren&#8217;t susceptible to emotions such as fear or greed, and they try to avoid a bias.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Money allocation:</b> They speculate only with money allocated for options —and they don&#8217;t spend a penny more.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Patience for opportunities:</b> They don&#8217;t trade every day. They wait for the right trades.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Planning:</b> They have plans for entering and exiting a trade.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Ongoing education:</b> They don&#8217;t assume they&#8217;ve learned all they need to know about options and the underlying assets.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Hedging:</b> They aren&#8217;t totally directional. They know that the market can sometimes go against them.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Back testing:</b> They use data from past or historical trades to see how trades would have or could have resulted.</p>\n</li>\n</ul>\n"},{"title":"4 great simulated stock-trading sites for high-level investors","thumb":null,"image":null,"content":"<p>Before you bet real money, it&#8217;s often a good idea to test your trading, investing, or speculating approach. Here are five great (free!) sites to help high-level investors learn through simulated trading:</p>\n<ul class=\"level-one\">\n<li>\n<p class=\"first-para\"><a href=\"http://www.wallstreetsurvivor.com\" target=\"_blank\" rel=\"noopener\"><b>Wall Street Survivor</b></a><b>:</b> This site provides great courses on investing for beginners and experienced investors.</p>\n</li>\n<li>\n<p class=\"first-para\"><a href=\"http://www.stocktrak.com\" target=\"_blank\" rel=\"noopener\"><b>Stock-Trak</b></a><b>:</b> This is a very active site for simulated trading.</p>\n</li>\n<li>\n<p class=\"first-para\"><a href=\"http://www.investopedia.com/simulator/\" target=\"_blank\" rel=\"noopener\"><b>Investopedia Stock Simulator</b></a><b>:</b> This is a great simulated stock investing program from a premier financial education site.</p>\n</li>\n<li>\n<p class=\"first-para\"><a href=\"http://www.vse.marketwatch.com/www.marketwatch.com/game/\" target=\"_blank\" rel=\"noopener\"><b>Virtual Stock Exchange</b></a><b>:</b> This is a very active simulated trading site and discussion forum with the trader community.</p>\n</li>\n</ul>\n"},{"title":"Recommended apps for high-level stock investing","thumb":null,"image":null,"content":"<p>In the age of tablets and smartphones, you can stay on top of your high-level investing pursuits with popular and powerful apps to keep track of stocks, do research and analysis, follow financial news and views, and more. You can find these apps on Apple&#8217;s iTunes site or via your favorite search engine:</p>\n<ul class=\"level-one\">\n<li>\n<p class=\"first-para\"><b>Forbes Intelligent Investing app:</b> Forbes is a financial site, and this app has many features and tools for electronic investing.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>The Wall Street Journal app:</b> This fully featured app for investors is from the premier financial publication.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Yahoo! Finance app:</b> Yahoo is one of the top go-to financial sites, and this app brings Yahoo&#8217;s news and data to your fingertips.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>StockTwits app:</b> This app has great features designed by one of the top stock investing forums online.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>The Bloomberg Business app:</b> Bloomberg gives you stock quotes and financial headlines with this handy app.</p>\n</li>\n</ul>\n"}],"videoInfo":{"videoId":null,"name":null,"accountId":null,"playerId":null,"thumbnailUrl":null,"description":null,"uploadDate":null}},"sponsorship":{"sponsorshipPage":false,"backgroundImage":{"src":null,"width":0,"height":0},"brandingLine":"","brandingLink":"","brandingLogo":{"src":null,"width":0,"height":0}},"primaryLearningPath":"Advance","lifeExpectancy":"One year","lifeExpectancySetFrom":"2022-04-06T00:00:00+00:00","dummiesForKids":"no","sponsoredContent":"no","adInfo":"","adPairKey":[]},"status":"publish","visibility":"public","articleId":207427},{"headers":{"creationTime":"2021-03-17T15:33:56+00:00","modifiedTime":"2022-03-31T15:40:54+00:00","timestamp":"2022-06-22T19:37:33+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Personal Finance","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34273"},"slug":"personal-finance","categoryId":34273},{"name":"Investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34288"},"slug":"investing","categoryId":34288},{"name":"Investment Vehicles","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34290"},"slug":"investment-vehicles","categoryId":34290},{"name":"Stocks","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34298"},"slug":"stocks","categoryId":34298}],"title":"11 Criteria for Choosing a Cannabis Investment","strippedTitle":"11 criteria for choosing a cannabis investment","slug":"11-criteria-for-choosing-a-cannabis-investment","canonicalUrl":"","seo":{"metaDescription":"The most profitable and safest way to invest in cannabis is to put your money in the best companies; here are criteria of good investments.","noIndex":0,"noFollow":0},"content":"You’ll find no shortage of investing strategies and schemes online for earning a fortune trading stocks, but no magic formula exists. If such a formula did exist, the person who discovered it probably wouldn’t be so eager to share it or to try to make money selling the “foolproof” technique.\r\n\r\nYou can also find plenty of investment gurus online touting the best <a href=\"https://www.dummies.com/health/cannabis-for-dummies-cheat-sheet/\" target=\"_blank\" rel=\"noopener\">cannabis companies</a> or stocks to invest in or predicting what will be the next big thing in cannabis, but can you really trust them?\r\n\r\n[caption id=\"attachment_283112\" align=\"alignnone\" width=\"556\"]<img class=\"size-full wp-image-283112\" src=\"https://www.dummies.com/wp-content/uploads/cannabis-invest-criteria.jpg\" alt=\"cannabis investment criteria\" width=\"556\" height=\"374\" /> © Lightspring / Shutterstock.com[/caption]\r\n\r\nThe most profitable and safest way to <a href=\"https://www.dummies.com/personal-finance/investing/frontier-markets/investing-in-cannabis-for-dummies-cheat-sheet/\" target=\"_blank\" rel=\"noopener\">invest in cannabis</a> is no secret: Put your money in the best companies. While that certainly sounds easy enough, how do you know which cannabis companies are best? How do you really know that a company will be successful and that you’ll earn a good return on your investment?\r\n\r\nThe answer is, you don’t. However, you can increase your odds by investing in profitable businesses, or businesses that have what it takes to be profitable. Following are 11 criteria for choosing a business to invest in.\r\n<p class=\"article-tips remember\">A business doesn’t have to meet all ten criteria to be a good investment. For example, if a business has a great management team, the fact that the business isn’t profitable yet may be less important. However, you should consider all these criteria before investing in any cannabis business.</p>\r\n\r\n<h2 id=\"tab1\" ><a name=\"_Toc48455416\"></a><a name=\"_Toc51666083\"></a>Experienced and successful management team</h2>\r\nI cannot stress enough the importance of vetting the people who are running the business. These are the folks who will make or break the business (and your investment), so you want to be sure they’re knowledgeable and experienced in both cannabis and running a business, and that they don’t have a history of failed business ventures. Here’s what to look for:\r\n<ul>\r\n \t<li>Any past criminal activity that could be a warning sign that the business is not legitimate, such as past Securities and Exchange Commission (SEC) violations</li>\r\n \t<li>Cannabis knowledge and experience</li>\r\n \t<li>Business management knowledge and experience</li>\r\n \t<li>No long track record of failed business ventures</li>\r\n \t<li>A positive reputation — respected in the cannabis industry or in business circles</li>\r\n</ul>\r\n<p class=\"article-tips remember\">An individual rarely has all of the qualities needed to run a successful cannabis business. For example, someone with loads of cannabis knowledge and experience may not have business or people management expertise. However, the management team, as a group, should have all of the knowledge, skills, and experience required.</p>\r\n\r\n<h2 id=\"tab2\" ><a name=\"_Toc48455417\"></a><a name=\"_Toc51666084\"></a>Steady revenue growth</h2>\r\nRevenue growth is a good indicator of a business’ success, showing whether sales are increasing or decreasing. If revenue growth is steady or negative, the business is failing to remain competitive. Check the business’ revenue from month to month and from quarter to quarter. If the company has been in business for several years, look at its annual revenue from one year to the next. You can find a company’s revenue on its income statement.\r\n<p class=\"article-tips tip\">To compare revenue growth between two or more businesses, convert the dollar values to percentages. Start with this year’s revenue, subtract the revenue from the same period last year, divide the result by last year’s revenue, and then multiply by 100. Note that you don’t need to know the revenue for an entire year to make this calculation. For example, suppose it’s July, so the business only has revenue from the first six months of this year. This year, the company had $10 million in revenue. For the first half of last year, the company had $8 million in revenue. Its revenue growth as a percentage is:</p>\r\n\r\n<blockquote>($10 million – $8 million)/$8 million x 100 = 25%</blockquote>\r\n<h2 id=\"tab3\" ><a name=\"_Toc48455418\"></a><a name=\"_Toc51666085\"></a>Consistent profit growth</h2>\r\nProfit is total revenue minus total expenses. A positive result means the business has earned more than it has spent. A well-run business shows growth not only in revenue but also in net profit. Negative or declining profit growth with rising revenue growth could be a sign that a business’ operational efficiency is dropping — that revenue isn’t keeping up with increases in expenses to operate the business.\r\n<p class=\"article-tips remember\">A negative profit margin (revenue minus expenses) is not necessarily bad. Successful businesses often operate at a loss when they’re investing toward future growth. If profit growth is negative or declining, dig deeper to find out what the business is investing in, how it’s getting the money to continue operating, and, if it is borrowing money, whether it has the means to make the loan payments.</p>\r\n\r\n<h2 id=\"tab4\" ><a name=\"_Toc48455419\"></a><a name=\"_Toc51666086\"></a>Comparatively low price-to-earnings ratio</h2>\r\nWhat is the<em> price-to-earnings</em> (P/E) ratio? It is a stock’s share price divided by its <em>earnings per share</em>, which is the company’s total profits divided by the number of shares. Suppose a stock’s share price is $10, its annual profit is $1 million, and the total number of shares is 500,000. Earnings per share is $1 million divided by 500,000, which equals $2 per share. The P/E ratio is $2 divided by $10, which is a ratio of 5 to 1.\r\n\r\nBy itself, the P/E ratio doesn’t tell you much, but when you compare it to the P/E ratios of other companies in the same business, it’s a good indicator of whether a stock’s price reflects the company’s value. A comparatively low P/E ratio may indicate a good value for your investment.\r\n<p class=\"article-tips warning\">Don’t consider the P/E ratio in a vacuum. A company that’s growing fast and investing heavily in that growth may have a high P/E ratio but be a better investment than a company that’s more profitable now but is losing market share.</p>\r\n\r\n<h2 id=\"tab5\" ><a name=\"_Toc48455420\"></a><a name=\"_Toc51666087\"></a>Positive money flow indicator</h2>\r\nOne way to gauge a company’s value is to check the <em>money flow index (MFI)</em>, which measures the momentum of a security by looking at movements of trading volume and price. If investment dollars are flowing toward one company and away from another, this trend could be a sign that the company drawing more investor interest is on its way up, while the other company is on its way down.\r\n<p class=\"article-tips remember\">The MFI falls into the realm of technical analysis, and it may not be the best indicator of a company’s health. A rising share price could be an indicator of a pump-and-dump scheme or simply that the company’s name was mentioned in a news article that shed a positive light on it. It’s more an indicator of investor sentiment than the health and vitality of the business.</p>\r\n\r\n<h2 id=\"tab6\" ><a name=\"_Toc48455421\"></a><a name=\"_Toc51666088\"></a>Expanding free cash flow</h2>\r\nWhen a company has a <em>positive cash flow</em> (is earning more than it’s spending), it has money to reinvest in the business, settle debts, pay expenses, build a buffer against future financial setbacks, and even share its profits with investors. Generally speaking, you want to invest in companies that demonstrate an increasingly positive cash flow.\r\n<p class=\"article-tips remember\">In a young industry like cannabis, in which businesses are just getting started, fewer businesses are likely to have a positive cash flow, let alone an expanding free cash flow. They’re more focused on getting started and growing. In addition, too much free cash flow could be a sign that the business isn’t spending enough money for growth or isn’t leveraging the money it has as optimally as possible.<a name=\"_Toc51666089\"></a></p>\r\n\r\n<h2 id=\"tab7\" >Operations in other states or countries</h2>\r\nDue to laws prohibiting the sale and transportation of marijuana across borders, cannabis businesses often struggle to survive in their own jurisdictions and face even greater challenges establishing operations in other states and countries. However, those that are successful in increasing their reach tend to be impacted less by challenges or setbacks in individual markets. In addition, they’re better positioned to expand into other markets as marijuana laws are relaxed.\r\n<h2 id=\"tab8\" ><a name=\"_Toc48455423\"></a><a name=\"_Toc51666090\"></a>Growing market</h2>\r\nMarkets for certain products expand and contract. For example, the market for vape products in the cannabis industry is huge, because many consumers want a similar experience to smoking it, without the smoke. However, when people started getting sick from black market vaping products, the vape market took a huge hit. It has since recovered, but this example shows how industries can be affected by new products (vapes) and news.\r\n\r\nBefore investing in a company, consider how well it caters to current consumer demand and how well it adjusts to changes in consumer demand. In many ways, the cannabis industry is like the smartphone industry — to be successful, a cannabis company must be able to stay ahead of the curve on consumer demand.\r\n<h2 id=\"tab9\" ><a name=\"_Toc48455424\"></a><a name=\"_Toc51666091\"></a>Increasing market share</h2>\r\nThe cannabis industry is highly competitive, and demand for product isn’t unlimited. To grow, businesses must increase their share of the pie; they can’t simply make more pie (increase demand). And, the ability to grow by expanding into different markets is often restricted by legal and regulatory issues. So, when investing in cannabis, look for companies with increasing market share.\r\n\r\nYou may be able to find out a cannabis company’s market share by researching on cannabis business news sites. Or, you can search these same sites to find out the total revenue for the industry in the country or state in which the company operates and then divide the company’s revenue by the industry’s revenue for that same period.\r\n<h2 id=\"tab10\" ><a name=\"_Toc48455425\"></a><a name=\"_Toc51666092\"></a>Positive reputation in the industry</h2>\r\nAs you immerse yourself in the cannabis industry and read cannabis newsletters and other publications, you’ll begin to notice the names of companies and people appearing again and again. Pay close attention to which companies and people seem to be leading the industry. Which people are renowned authorities in the industry? Which companies and people seem to be the most highly respected? Then, research these companies and individuals to find out what they’re doing and what they’re saying about other businesses and individuals in the industry.\r\n\r\nAs you begin to identify the movers and shakers in the industry, you’ll develop a better sense of where to invest your money. Who’s partnering with whom? Where are cannabis companies going to buy the products and services they need? You can often tell a lot about a company by looking at its business associates.\r\n<h2 id=\"tab11\" >Manageable debt</h2>\r\nPlenty of companies, including cannabis companies, struggle with solvency. Excessive debt is a key issue in today’s economy. When domestic energy became a hot industry a few years ago, many of those companies ultimately went bankrupt due to unsustainable debt. Imagine if you didn’t have enough income to cover your mortgage, utility bills, and credit card payments — the same thing can happen to businesses. Managing debt is a critical success factor especially for cannabis (or any) companies that are not yet profitable.\r\n\r\nYou also want to look at the debt holder. Some companies, particularly those that seek aged debt, are toxic lenders. Avoid any company that has debt holders with convertible notes or aged debt — it’s a killer.","description":"You’ll find no shortage of investing strategies and schemes online for earning a fortune trading stocks, but no magic formula exists. If such a formula did exist, the person who discovered it probably wouldn’t be so eager to share it or to try to make money selling the “foolproof” technique.\r\n\r\nYou can also find plenty of investment gurus online touting the best <a href=\"https://www.dummies.com/health/cannabis-for-dummies-cheat-sheet/\" target=\"_blank\" rel=\"noopener\">cannabis companies</a> or stocks to invest in or predicting what will be the next big thing in cannabis, but can you really trust them?\r\n\r\n[caption id=\"attachment_283112\" align=\"alignnone\" width=\"556\"]<img class=\"size-full wp-image-283112\" src=\"https://www.dummies.com/wp-content/uploads/cannabis-invest-criteria.jpg\" alt=\"cannabis investment criteria\" width=\"556\" height=\"374\" /> © Lightspring / Shutterstock.com[/caption]\r\n\r\nThe most profitable and safest way to <a href=\"https://www.dummies.com/personal-finance/investing/frontier-markets/investing-in-cannabis-for-dummies-cheat-sheet/\" target=\"_blank\" rel=\"noopener\">invest in cannabis</a> is no secret: Put your money in the best companies. While that certainly sounds easy enough, how do you know which cannabis companies are best? How do you really know that a company will be successful and that you’ll earn a good return on your investment?\r\n\r\nThe answer is, you don’t. However, you can increase your odds by investing in profitable businesses, or businesses that have what it takes to be profitable. Following are 11 criteria for choosing a business to invest in.\r\n<p class=\"article-tips remember\">A business doesn’t have to meet all ten criteria to be a good investment. For example, if a business has a great management team, the fact that the business isn’t profitable yet may be less important. However, you should consider all these criteria before investing in any cannabis business.</p>\r\n\r\n<h2 id=\"tab1\" ><a name=\"_Toc48455416\"></a><a name=\"_Toc51666083\"></a>Experienced and successful management team</h2>\r\nI cannot stress enough the importance of vetting the people who are running the business. These are the folks who will make or break the business (and your investment), so you want to be sure they’re knowledgeable and experienced in both cannabis and running a business, and that they don’t have a history of failed business ventures. Here’s what to look for:\r\n<ul>\r\n \t<li>Any past criminal activity that could be a warning sign that the business is not legitimate, such as past Securities and Exchange Commission (SEC) violations</li>\r\n \t<li>Cannabis knowledge and experience</li>\r\n \t<li>Business management knowledge and experience</li>\r\n \t<li>No long track record of failed business ventures</li>\r\n \t<li>A positive reputation — respected in the cannabis industry or in business circles</li>\r\n</ul>\r\n<p class=\"article-tips remember\">An individual rarely has all of the qualities needed to run a successful cannabis business. For example, someone with loads of cannabis knowledge and experience may not have business or people management expertise. However, the management team, as a group, should have all of the knowledge, skills, and experience required.</p>\r\n\r\n<h2 id=\"tab2\" ><a name=\"_Toc48455417\"></a><a name=\"_Toc51666084\"></a>Steady revenue growth</h2>\r\nRevenue growth is a good indicator of a business’ success, showing whether sales are increasing or decreasing. If revenue growth is steady or negative, the business is failing to remain competitive. Check the business’ revenue from month to month and from quarter to quarter. If the company has been in business for several years, look at its annual revenue from one year to the next. You can find a company’s revenue on its income statement.\r\n<p class=\"article-tips tip\">To compare revenue growth between two or more businesses, convert the dollar values to percentages. Start with this year’s revenue, subtract the revenue from the same period last year, divide the result by last year’s revenue, and then multiply by 100. Note that you don’t need to know the revenue for an entire year to make this calculation. For example, suppose it’s July, so the business only has revenue from the first six months of this year. This year, the company had $10 million in revenue. For the first half of last year, the company had $8 million in revenue. Its revenue growth as a percentage is:</p>\r\n\r\n<blockquote>($10 million – $8 million)/$8 million x 100 = 25%</blockquote>\r\n<h2 id=\"tab3\" ><a name=\"_Toc48455418\"></a><a name=\"_Toc51666085\"></a>Consistent profit growth</h2>\r\nProfit is total revenue minus total expenses. A positive result means the business has earned more than it has spent. A well-run business shows growth not only in revenue but also in net profit. Negative or declining profit growth with rising revenue growth could be a sign that a business’ operational efficiency is dropping — that revenue isn’t keeping up with increases in expenses to operate the business.\r\n<p class=\"article-tips remember\">A negative profit margin (revenue minus expenses) is not necessarily bad. Successful businesses often operate at a loss when they’re investing toward future growth. If profit growth is negative or declining, dig deeper to find out what the business is investing in, how it’s getting the money to continue operating, and, if it is borrowing money, whether it has the means to make the loan payments.</p>\r\n\r\n<h2 id=\"tab4\" ><a name=\"_Toc48455419\"></a><a name=\"_Toc51666086\"></a>Comparatively low price-to-earnings ratio</h2>\r\nWhat is the<em> price-to-earnings</em> (P/E) ratio? It is a stock’s share price divided by its <em>earnings per share</em>, which is the company’s total profits divided by the number of shares. Suppose a stock’s share price is $10, its annual profit is $1 million, and the total number of shares is 500,000. Earnings per share is $1 million divided by 500,000, which equals $2 per share. The P/E ratio is $2 divided by $10, which is a ratio of 5 to 1.\r\n\r\nBy itself, the P/E ratio doesn’t tell you much, but when you compare it to the P/E ratios of other companies in the same business, it’s a good indicator of whether a stock’s price reflects the company’s value. A comparatively low P/E ratio may indicate a good value for your investment.\r\n<p class=\"article-tips warning\">Don’t consider the P/E ratio in a vacuum. A company that’s growing fast and investing heavily in that growth may have a high P/E ratio but be a better investment than a company that’s more profitable now but is losing market share.</p>\r\n\r\n<h2 id=\"tab5\" ><a name=\"_Toc48455420\"></a><a name=\"_Toc51666087\"></a>Positive money flow indicator</h2>\r\nOne way to gauge a company’s value is to check the <em>money flow index (MFI)</em>, which measures the momentum of a security by looking at movements of trading volume and price. If investment dollars are flowing toward one company and away from another, this trend could be a sign that the company drawing more investor interest is on its way up, while the other company is on its way down.\r\n<p class=\"article-tips remember\">The MFI falls into the realm of technical analysis, and it may not be the best indicator of a company’s health. A rising share price could be an indicator of a pump-and-dump scheme or simply that the company’s name was mentioned in a news article that shed a positive light on it. It’s more an indicator of investor sentiment than the health and vitality of the business.</p>\r\n\r\n<h2 id=\"tab6\" ><a name=\"_Toc48455421\"></a><a name=\"_Toc51666088\"></a>Expanding free cash flow</h2>\r\nWhen a company has a <em>positive cash flow</em> (is earning more than it’s spending), it has money to reinvest in the business, settle debts, pay expenses, build a buffer against future financial setbacks, and even share its profits with investors. Generally speaking, you want to invest in companies that demonstrate an increasingly positive cash flow.\r\n<p class=\"article-tips remember\">In a young industry like cannabis, in which businesses are just getting started, fewer businesses are likely to have a positive cash flow, let alone an expanding free cash flow. They’re more focused on getting started and growing. In addition, too much free cash flow could be a sign that the business isn’t spending enough money for growth or isn’t leveraging the money it has as optimally as possible.<a name=\"_Toc51666089\"></a></p>\r\n\r\n<h2 id=\"tab7\" >Operations in other states or countries</h2>\r\nDue to laws prohibiting the sale and transportation of marijuana across borders, cannabis businesses often struggle to survive in their own jurisdictions and face even greater challenges establishing operations in other states and countries. However, those that are successful in increasing their reach tend to be impacted less by challenges or setbacks in individual markets. In addition, they’re better positioned to expand into other markets as marijuana laws are relaxed.\r\n<h2 id=\"tab8\" ><a name=\"_Toc48455423\"></a><a name=\"_Toc51666090\"></a>Growing market</h2>\r\nMarkets for certain products expand and contract. For example, the market for vape products in the cannabis industry is huge, because many consumers want a similar experience to smoking it, without the smoke. However, when people started getting sick from black market vaping products, the vape market took a huge hit. It has since recovered, but this example shows how industries can be affected by new products (vapes) and news.\r\n\r\nBefore investing in a company, consider how well it caters to current consumer demand and how well it adjusts to changes in consumer demand. In many ways, the cannabis industry is like the smartphone industry — to be successful, a cannabis company must be able to stay ahead of the curve on consumer demand.\r\n<h2 id=\"tab9\" ><a name=\"_Toc48455424\"></a><a name=\"_Toc51666091\"></a>Increasing market share</h2>\r\nThe cannabis industry is highly competitive, and demand for product isn’t unlimited. To grow, businesses must increase their share of the pie; they can’t simply make more pie (increase demand). And, the ability to grow by expanding into different markets is often restricted by legal and regulatory issues. So, when investing in cannabis, look for companies with increasing market share.\r\n\r\nYou may be able to find out a cannabis company’s market share by researching on cannabis business news sites. Or, you can search these same sites to find out the total revenue for the industry in the country or state in which the company operates and then divide the company’s revenue by the industry’s revenue for that same period.\r\n<h2 id=\"tab10\" ><a name=\"_Toc48455425\"></a><a name=\"_Toc51666092\"></a>Positive reputation in the industry</h2>\r\nAs you immerse yourself in the cannabis industry and read cannabis newsletters and other publications, you’ll begin to notice the names of companies and people appearing again and again. Pay close attention to which companies and people seem to be leading the industry. Which people are renowned authorities in the industry? Which companies and people seem to be the most highly respected? Then, research these companies and individuals to find out what they’re doing and what they’re saying about other businesses and individuals in the industry.\r\n\r\nAs you begin to identify the movers and shakers in the industry, you’ll develop a better sense of where to invest your money. Who’s partnering with whom? Where are cannabis companies going to buy the products and services they need? You can often tell a lot about a company by looking at its business associates.\r\n<h2 id=\"tab11\" >Manageable debt</h2>\r\nPlenty of companies, including cannabis companies, struggle with solvency. Excessive debt is a key issue in today’s economy. When domestic energy became a hot industry a few years ago, many of those companies ultimately went bankrupt due to unsustainable debt. Imagine if you didn’t have enough income to cover your mortgage, utility bills, and credit card payments — the same thing can happen to businesses. Managing debt is a critical success factor especially for cannabis (or any) companies that are not yet profitable.\r\n\r\nYou also want to look at the debt holder. Some companies, particularly those that seek aged debt, are toxic lenders. Avoid any company that has debt holders with convertible notes or aged debt — it’s a killer.","blurb":"","authors":[{"authorId":33497,"name":"Steven R. Gormley","slug":"steven-r-gormley","description":"Steven Gormley is CEO at Radiko Holdings. He's a celebrated expert in the legal marijuana sector and his analyses have been featured prominently in media outlets, including Forbes, the Wall Street Journal, and Marketwatch. Gormley also is COO of Silverback Investments, Inc., a management company in the cannabis space.","_links":{"self":"https://dummies-api.dummies.com/v2/authors/33497"}}],"primaryCategoryTaxonomy":{"categoryId":34298,"title":"Stocks","slug":"stocks","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34298"}},"secondaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"tertiaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"trendingArticles":null,"inThisArticle":[{"label":"Experienced and successful management team","target":"#tab1"},{"label":"Steady revenue growth","target":"#tab2"},{"label":"Consistent profit growth","target":"#tab3"},{"label":"Comparatively low price-to-earnings ratio","target":"#tab4"},{"label":"Positive money flow indicator","target":"#tab5"},{"label":"Expanding free cash flow","target":"#tab6"},{"label":"Operations in other states or countries","target":"#tab7"},{"label":"Growing market","target":"#tab8"},{"label":"Increasing market share","target":"#tab9"},{"label":"Positive reputation in the industry","target":"#tab10"},{"label":"Manageable debt","target":"#tab11"}],"relatedArticles":{"fromBook":[],"fromCategory":[{"articleId":283116,"title":"10 Reasons Not to Invest in Marijuana Stocks","slug":"10-reasons-not-to-invest-in-marijuana-stocks","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/283116"}},{"articleId":283105,"title":"Cannabis Investments: Risks Inherent in Momentum Investing","slug":"cannabis-investments-risks-inherent-in-momentum-investing","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/283105"}},{"articleId":283098,"title":"Investing in Cannabis: Spotting Opportunities to Buy or Sell","slug":"investing-in-cannabis-spotting-opportunities-to-buy-or-sell","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/283098"}},{"articleId":283089,"title":"Investing in Cannabis: The Bid-Ask Spread","slug":"investing-in-cannabis-the-bid-ask-spread","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/283089"}},{"articleId":282966,"title":"Over-the-Counter Marijuana Stocks","slug":"over-the-counter-marijuana-stocks","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/282966"}}]},"hasRelatedBookFromSearch":false,"relatedBook":{"bookId":0,"slug":null,"isbn":null,"categoryList":null,"amazon":null,"image":null,"title":null,"testBankPinActivationLink":null,"bookOutOfPrint":false,"authorsInfo":null,"authors":null,"_links":null},"collections":[{"title":"For the Budding Cannabis Enthusiast","slug":"for-the-budding-cannabis-enthusiast","collectionId":291903}],"articleAds":{"footerAd":"<div class=\"du-ad-region row\" id=\"article_page_adhesion_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_adhesion_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;investment-vehicles&quot;,&quot;stocks&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[null]}]\" id=\"du-slot-62b36f7d5c9b9\"></div></div>","rightAd":"<div class=\"du-ad-region row\" id=\"article_page_right_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_right_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;investment-vehicles&quot;,&quot;stocks&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[null]}]\" id=\"du-slot-62b36f7d5d13c\"></div></div>"},"articleType":{"articleType":"Articles","articleList":null,"content":null,"videoInfo":{"videoId":null,"name":null,"accountId":null,"playerId":null,"thumbnailUrl":null,"description":null,"uploadDate":null}},"sponsorship":{"sponsorshipPage":false,"backgroundImage":{"src":null,"width":0,"height":0},"brandingLine":"","brandingLink":"","brandingLogo":{"src":null,"width":0,"height":0}},"primaryLearningPath":"Advance","lifeExpectancy":"One year","lifeExpectancySetFrom":"2022-03-31T00:00:00+00:00","dummiesForKids":"no","sponsoredContent":"no","adInfo":"","adPairKey":[]},"status":"publish","visibility":"public","articleId":283111},{"headers":{"creationTime":"2021-03-16T14:36:14+00:00","modifiedTime":"2022-03-31T15:29:25+00:00","timestamp":"2022-06-22T19:37:33+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Personal Finance","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34273"},"slug":"personal-finance","categoryId":34273},{"name":"Investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34288"},"slug":"investing","categoryId":34288},{"name":"Investment Vehicles","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34290"},"slug":"investment-vehicles","categoryId":34290},{"name":"Stocks","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34298"},"slug":"stocks","categoryId":34298}],"title":"The Impact of Laws on the Cannabis Industry","strippedTitle":"the impact of laws on the cannabis industry","slug":"the-impact-of-laws-on-the-cannabis-industry","canonicalUrl":"","seo":{"metaDescription":"Get up to speed on federal, state, local, and international marijuana laws that impact the cannabis industry and investment opportunities.","noIndex":0,"noFollow":0},"content":"<a name=\"_Toc38430799\"></a>When discussions arise about the legality of cannabis, they usually revolve around growing it, selling it, or possessing it. However, cannabis laws and the enforcement of those laws also impact the industry, influencing everything from where different <a href=\"https://www.dummies.com/health/cannabis-for-dummies-cheat-sheet/\" target=\"_blank\" rel=\"noopener\">cannabis</a> businesses can operate and under what conditions, to the taxes and fees they pay and, ultimately, the cost and availability of the product.\r\n\r\nComplications and confusion often arise over differences in laws and regulations at the federal, state, and local levels. For example, in the U.S., cannabis is illegal at the federal level, legal for medical use in many states, legal for both medical and adult use in several states, and prohibited for sale and possession in many municipalities within states where it’s legal.\r\n\r\nIn 2013, Uruguay became the first country to officially legalize cannabis for both medical and adult use. In 2018, Canada became the second country and the first G7 member to legalize cannabis. In the provinces of Quebec and Alberta, the legal age is 18; in the remainder of the country, it’s 19. In New Jersey, before voters even had a chance to vote on a proposition to legalize adult-use marijuana, more than 50 local governments already had passed laws banning its sale or possession.\r\n\r\nThis article brings you up to speed on federal, state, local, and international marijuana laws in the hopes that by knowing the laws, you’ll be better prepared to ride the waves that are sure to rock the cannabis industry as its future unfolds.\r\n<h2 id=\"tab1\" ><a name=\"_Toc45796470\"></a>U.S. cannabis federal law and enforcement</h2>\r\n<a name=\"_Toc38430800\"></a>In the U.S., in the 1800s, marijuana was used as an ingredient in many medicinal products sold in pharmacies across the country, but by 1931, 29 states had outlawed it, citing research at the time that linked the use of marijuana with violence, criminal activity, and other deviant social behaviors.\r\n\r\nFederal regulation didn’t occur until President Franklin D. Roosevelt signed the Marihuana Tax Act of 1937, which required every person who sold, acquired, dispensed, or possessed marijuana to register with the Internal Revenue Service (IRS), pay taxes on their transactions, and complete an order form that required the name and address of both buyer and seller and the amount of marijuana being sold or bought. Although the act did not specifically criminalize marijuana, it came to be used in that way.\r\n\r\nIn 1970, the Supreme Court overturned the law, and Congress repealed it but simultaneously passed the Controlled Substances Act, designating marijuana a Schedule 1 controlled substance based on the belief that it had a high potential for abuse, no currently accepted medical use, and a lack of accepted safety regarding the use of the drug. Adding marijuana to the list of Schedule 1 controlled substances (along with heroin, LSD, ecstasy, and magic mushrooms) effectively made it illegal for anything other than very limited research.\r\n\r\nIn particular, the following activities are federal crimes:\r\n<ul>\r\n \t<li>Transporting cannabis across any state line, even if it’s transported from one state in which it’s legal directly to another.</li>\r\n \t<li>Flying with cannabis, because it enters into federal airspace.</li>\r\n \t<li>Possessing or using marijuana on federal land, including national parks and forests.</li>\r\n</ul>\r\nFederal laws and their enforcement impact cannabis businesses and investors in the following ways:\r\n<ul>\r\n \t<li>Because transporting cannabis across state lines is illegal, cannabis businesses that want to expand sales into other states must duplicate their operations in those states. They can’t take advantage of economies of scale simply by shipping their products across state lines.</li>\r\n \t<li>The Bank Secrecy Act (BSA) and federal money-laundering statutes discourage banks from offering services to cannabis businesses. (Passed in 1970, the BSA is a U.S. law that requires financial institutions in the U.S. to assist federal agencies in detecting and preventing money laundering.) Violations can result in steep fines and imprisonment of bank officials. Inaccessibility to basic banking services increases the costs and complexities of operating cannabis businesses.</li>\r\n</ul>\r\nSome banks are starting to serve cannabis businesses, and the Financial Crimes Enforcement Network, the financial intelligence unit of the U.S. Department of Treasury, offers guidance to banks on how to comply with regulations when serving marijuana and ancillary businesses. However, compliance places an added burden on banks to police the marijuana businesses they serve. In addition, the Department of Justice reserves the right to prosecute banks for working with these businesses, which face these obstacles:\r\n<ul>\r\n \t<li>Without basic banking services, cannabis businesses have no access to the capital markets, which are useful for raising money for development and growth. They need to rely on private investors, which provides private investment opportunities but at a very high risk.</li>\r\n \t<li>According to the principles of contract law, any contract in breach of public policy is void and unenforceable, which is a major concern for investors or funds regarding any investment contract’s legitimacy. This concern serves as another obstacle to cannabis businesses seeking to raise investment capital for development or expansion.</li>\r\n \t<li>Cannabis businesses are required to pay income taxes, but filing tax returns (federal and state) constitutes self-incrimination. In addition, without banking services, cannabis businesses must pay their taxes in cash, which is inconvenient, costly, and risky.</li>\r\n \t<li>Due to the 280E provision in the IRS tax code, cannabis businesses are prohibited from deducting ordinary business expenses from their gross income, thereby significantly increasing their tax burden and negatively impacting their profitability.</li>\r\n \t<li>Bankruptcy protections are unavailable for cannabis businesses in the U.S. Without the option to restructure, cannabis businesses are often forced to shut down when they encounter credit issues. As a result, creditors may have difficulty collecting their debts, which discourages them from loaning money to cannabis businesses in the first place.</li>\r\n \t<li>Fear among potential customers of losing a federal job, student financial aid, the right to own a firearm, or eligibility for federally subsidized housing can put downward pressure on cannabis sales.</li>\r\n \t<li>If marijuana is legalized at the federal level, the entire business environment will change, allowing large, well-established companies in other industries, such as alcohol, tobacco, and pharmaceuticals, to compete for market share.</li>\r\n</ul>\r\nSo, what does this mean for <a href=\"https://www.dummies.com/personal-finance/investing/frontier-markets/investing-in-cannabis-for-dummies-cheat-sheet/\">investors</a>? Regulations generally move in a direction that favors growth and investment opportunity. At this time, more than two-thirds of Americans live in a jurisdiction that has some form of legal cannabis. The country is trending toward a repeal of prohibition, but that will likely be a slow and clumsy process from a regulatory standpoint.\r\n\r\nIf you’re looking to invest in licenses and permits, consider states with a more limited number of granted permits. States that limit the number of permits make those permits more valuable by doing so. You also want to consider states that have constitutions providing for voter referendums.\r\n\r\nAs you do, you’ll notice that most states that allow for referendums are west of the Mississippi and business friendly. There’s a historical reason for that. Those states joined the union in the 19th century, and their state constitutions are based on the Spanish and French democratic models that allow voters to pass laws by referendum. As a result, and generally speaking, states with voter referendum and business-friendly regulatory environments tend to have legislation providing for some degree of legalized cannabis.\r\n<p class=\"article-tips warning\">Be careful when you’re considering investing in any company whose licenses are based on narrow zoning laws. I’ve invested in real estate that was once coveted because it was zoned for cannabis only to have the city loosen its zoning restrictions six months later. I paid a premium for the property, only to see its value drop when zoning laws made more real estate available for cannabis businesses. I could have avoided that mistake by researching more thoroughly what was on the ballot or what was being discussed by the zoning committee.</p>\r\nKeep an eye on the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act, which would amend the Controlled Substances Act (CSA) so that any state-legal cannabis activity would no longer be considered illegal under federal law.\r\n\r\nThe STATES Act would also solve the cannabis banking problem, because the federal money-laundering statute is triggered only for illegal activities. Likewise, because the 280E provision applies only to revenue generated by illegal means, cannabis businesses would be able to deduct their business expenses just like any legal business.\r\n\r\nAlthough the STATES Act has bipartisan support and was passed by a large margin in the House of Representatives, as of this writing, the bill was hung up in the Senate.\r\n<h2 id=\"tab2\" ><a name=\"_Toc45796471\"></a>The Cole Memorandum</h2>\r\nDuring the Obama administration, on August 29, 2013, U.S. Deputy Attorney General James M. Cole issued a trio of memos, including the Cole Memorandum, to all U.S. attorneys general. The memo informed them that due to limited resources, the U.S. Department of Justice would not be enforcing federal marijuana prohibition in states that legalized and effectively regulated and enforced their own marijuana laws.\r\n\r\nThe memo directed the state attorneys general to “not focus federal resources in your states on individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana.”\r\n\r\nInstead, states were encouraged to address federal priorities, for example, “by implementing effective measures to prevent diversion of marijuana outside the regulated system and to other states, prohibiting access to marijuana by minors, and replacing an illicit marijuana trade that funds criminal enterprises with a tightly regulated market in which revenues are tracked and accounted for.”\r\n\r\nThis memo was rescinded under the Trump administration in January 2018 by Attorney General Jeff Sessions. The impact of the rescission in individual states has yet to be determined, but it’s a cause for concern because it indicates that the feds may be leaning toward greater enforcement of the federal prohibition of marijuana.\r\n<h2 id=\"tab3\" >State cannabis laws</h2>\r\n<a name=\"_Toc38430801\"></a>Although cannabis is federally illegal, each state has the right to legalize it within its borders and set the rules and regulations for personal and commercial growth, production, transportation, sale, possession, and use. States fall into one of the following five categories:\r\n<ul>\r\n \t<li><strong>Fully legal:</strong> Both medicinal and adult use are allowed.</li>\r\n \t<li><strong>Fully illegal:</strong> No medicinal or adult use is allowed or decriminalized (see the final item in this list for more about decriminalization).</li>\r\n \t<li><strong>Medical and decriminalized: </strong>Medical use is legal, and possession and use is decriminalized.</li>\r\n \t<li><strong>Medical only: </strong>Marijuana is legalized only for medical use, which in some states allows only cannabidiol (CBD) oil use (CBD doesn’t contain the psychoactive ingredient THC).</li>\r\n \t<li><strong>Decriminalized: </strong>Possessing or using small amounts of marijuana will not lead to arrest, prosecution, prison time, or a criminal record (decriminalization details vary by state).</li>\r\n</ul>\r\n<p class=\"article-tips tip\">The easiest way to find out where each state in the U.S. stands on legalization is to search the web for “marijuana legal states.” You’ll see a color-coded map like the one shown. State marijuana laws change frequently, so access a map from a reliable source that has current information.</p>\r\n\r\n\r\n[caption id=\"attachment_282943\" align=\"alignnone\" width=\"556\"]<img class=\"size-full wp-image-282943\" src=\"https://www.dummies.com/wp-content/uploads/cannabis-invest-online-map.jpg\" alt=\"cannabis laws mapped out\" width=\"556\" height=\"455\" /> Check out an online map to determine overall legal status.[/caption]\r\n\r\nState laws and enforcement of those laws can negatively impact cannabis businesses and investors in several ways, including the following:\r\n<ul>\r\n \t<li>Every state in which marijuana is legal has numerous rules and regulations that apply to marijuana growers, producers, sellers, and distributors. These rules and regulations govern everything from verifying the identities of buyers to packing, labeling, and tracking products, and all of them add to the cost and complexity of doing business.</li>\r\n \t<li>Marijuana taxes vary by state, with adult-use marijuana typically taxed at a much higher rate than medical marijuana. Higher taxes add to the product cost and can drive sales to illegal sellers, negatively impacting sales for legal businesses.</li>\r\n \t<li>States vary in the number of legal cannabis businesses they allow, how much they charge for licenses, and how quickly they implement legalization, which can all impact how successful cannabis businesses are in each state.</li>\r\n \t<li>Some states require marijuana businesses to reserve large amounts of cash before applying for a license. This practice encourages <em>rolling up</em> marijuana businesses—a method that involves acquiring and merging small businesses to increase their collective value. In these states, large marijuana businesses have a distinct advantage over smaller operations.</li>\r\n \t<li>State laws may stipulate residency requirements for investors in cannabis businesses.</li>\r\n \t<li>Some states in which marijuana is legal are less stringent in enforcing laws against illegal sales, which can negatively impact sales for legal businesses.</li>\r\n</ul>\r\n<h2 id=\"tab4\" ><a name=\"_Toc38430802\"></a><a name=\"_Toc532218062\"></a><a name=\"_Toc45796472\"></a>Local laws</h2>\r\nIn states where cannabis is legal, local municipalities can separately regulate its growth, production, and sale within their borders. They are also allowed to add taxes and fees to commercial efforts above and beyond those of the state. In some cases, municipalities can completely ban commercial endeavors. For example, Colorado Springs permits medical sales but has continued to ban adult-use dispensaries. Penalties can vary significantly from one municipality to another.\r\n\r\nThese variations and costs can negatively impact the sales and profits of cannabis businesses, even in states in which cannabis is legal.\r\n<h2 id=\"tab5\" ><a name=\"_Toc45796473\"></a>Cannabis laws in other countries</h2>\r\nAs an investor, you want to know about a cannabis company’s range of operations—specifically, the countries it serves around the world. A company that operates in several countries may be less susceptible to changes in laws and regulations than a company operating in only one country. In addition, a company’s global reach reflects its ambitions for growth. Here’s a list of countries in which cannabis is legal or decriminalized to some degree:\r\n<ul>\r\n \t<li>Australia</li>\r\n \t<li>Canada</li>\r\n \t<li>Germany</li>\r\n \t<li>Italy</li>\r\n \t<li>Mexico</li>\r\n \t<li>The Netherlands</li>\r\n \t<li>New Zealand</li>\r\n \t<li>South Korea</li>\r\n \t<li>Spain</li>\r\n \t<li>Switzerland</li>\r\n \t<li>Uruguay</li>\r\n \t<li>S. Virgin Islands</li>\r\n</ul>\r\n<p class=\"article-tips remember\">Carefully research each market before investing in companies that operate in it. Examine the laws and enforcement of those laws, cannabis demand, the costs of doing business, competition from illegal sellers, and other factors to gain a better understanding of the potential for sales, profits, and growth, as well as the risks involved.</p>","description":"<a name=\"_Toc38430799\"></a>When discussions arise about the legality of cannabis, they usually revolve around growing it, selling it, or possessing it. However, cannabis laws and the enforcement of those laws also impact the industry, influencing everything from where different <a href=\"https://www.dummies.com/health/cannabis-for-dummies-cheat-sheet/\" target=\"_blank\" rel=\"noopener\">cannabis</a> businesses can operate and under what conditions, to the taxes and fees they pay and, ultimately, the cost and availability of the product.\r\n\r\nComplications and confusion often arise over differences in laws and regulations at the federal, state, and local levels. For example, in the U.S., cannabis is illegal at the federal level, legal for medical use in many states, legal for both medical and adult use in several states, and prohibited for sale and possession in many municipalities within states where it’s legal.\r\n\r\nIn 2013, Uruguay became the first country to officially legalize cannabis for both medical and adult use. In 2018, Canada became the second country and the first G7 member to legalize cannabis. In the provinces of Quebec and Alberta, the legal age is 18; in the remainder of the country, it’s 19. In New Jersey, before voters even had a chance to vote on a proposition to legalize adult-use marijuana, more than 50 local governments already had passed laws banning its sale or possession.\r\n\r\nThis article brings you up to speed on federal, state, local, and international marijuana laws in the hopes that by knowing the laws, you’ll be better prepared to ride the waves that are sure to rock the cannabis industry as its future unfolds.\r\n<h2 id=\"tab1\" ><a name=\"_Toc45796470\"></a>U.S. cannabis federal law and enforcement</h2>\r\n<a name=\"_Toc38430800\"></a>In the U.S., in the 1800s, marijuana was used as an ingredient in many medicinal products sold in pharmacies across the country, but by 1931, 29 states had outlawed it, citing research at the time that linked the use of marijuana with violence, criminal activity, and other deviant social behaviors.\r\n\r\nFederal regulation didn’t occur until President Franklin D. Roosevelt signed the Marihuana Tax Act of 1937, which required every person who sold, acquired, dispensed, or possessed marijuana to register with the Internal Revenue Service (IRS), pay taxes on their transactions, and complete an order form that required the name and address of both buyer and seller and the amount of marijuana being sold or bought. Although the act did not specifically criminalize marijuana, it came to be used in that way.\r\n\r\nIn 1970, the Supreme Court overturned the law, and Congress repealed it but simultaneously passed the Controlled Substances Act, designating marijuana a Schedule 1 controlled substance based on the belief that it had a high potential for abuse, no currently accepted medical use, and a lack of accepted safety regarding the use of the drug. Adding marijuana to the list of Schedule 1 controlled substances (along with heroin, LSD, ecstasy, and magic mushrooms) effectively made it illegal for anything other than very limited research.\r\n\r\nIn particular, the following activities are federal crimes:\r\n<ul>\r\n \t<li>Transporting cannabis across any state line, even if it’s transported from one state in which it’s legal directly to another.</li>\r\n \t<li>Flying with cannabis, because it enters into federal airspace.</li>\r\n \t<li>Possessing or using marijuana on federal land, including national parks and forests.</li>\r\n</ul>\r\nFederal laws and their enforcement impact cannabis businesses and investors in the following ways:\r\n<ul>\r\n \t<li>Because transporting cannabis across state lines is illegal, cannabis businesses that want to expand sales into other states must duplicate their operations in those states. They can’t take advantage of economies of scale simply by shipping their products across state lines.</li>\r\n \t<li>The Bank Secrecy Act (BSA) and federal money-laundering statutes discourage banks from offering services to cannabis businesses. (Passed in 1970, the BSA is a U.S. law that requires financial institutions in the U.S. to assist federal agencies in detecting and preventing money laundering.) Violations can result in steep fines and imprisonment of bank officials. Inaccessibility to basic banking services increases the costs and complexities of operating cannabis businesses.</li>\r\n</ul>\r\nSome banks are starting to serve cannabis businesses, and the Financial Crimes Enforcement Network, the financial intelligence unit of the U.S. Department of Treasury, offers guidance to banks on how to comply with regulations when serving marijuana and ancillary businesses. However, compliance places an added burden on banks to police the marijuana businesses they serve. In addition, the Department of Justice reserves the right to prosecute banks for working with these businesses, which face these obstacles:\r\n<ul>\r\n \t<li>Without basic banking services, cannabis businesses have no access to the capital markets, which are useful for raising money for development and growth. They need to rely on private investors, which provides private investment opportunities but at a very high risk.</li>\r\n \t<li>According to the principles of contract law, any contract in breach of public policy is void and unenforceable, which is a major concern for investors or funds regarding any investment contract’s legitimacy. This concern serves as another obstacle to cannabis businesses seeking to raise investment capital for development or expansion.</li>\r\n \t<li>Cannabis businesses are required to pay income taxes, but filing tax returns (federal and state) constitutes self-incrimination. In addition, without banking services, cannabis businesses must pay their taxes in cash, which is inconvenient, costly, and risky.</li>\r\n \t<li>Due to the 280E provision in the IRS tax code, cannabis businesses are prohibited from deducting ordinary business expenses from their gross income, thereby significantly increasing their tax burden and negatively impacting their profitability.</li>\r\n \t<li>Bankruptcy protections are unavailable for cannabis businesses in the U.S. Without the option to restructure, cannabis businesses are often forced to shut down when they encounter credit issues. As a result, creditors may have difficulty collecting their debts, which discourages them from loaning money to cannabis businesses in the first place.</li>\r\n \t<li>Fear among potential customers of losing a federal job, student financial aid, the right to own a firearm, or eligibility for federally subsidized housing can put downward pressure on cannabis sales.</li>\r\n \t<li>If marijuana is legalized at the federal level, the entire business environment will change, allowing large, well-established companies in other industries, such as alcohol, tobacco, and pharmaceuticals, to compete for market share.</li>\r\n</ul>\r\nSo, what does this mean for <a href=\"https://www.dummies.com/personal-finance/investing/frontier-markets/investing-in-cannabis-for-dummies-cheat-sheet/\">investors</a>? Regulations generally move in a direction that favors growth and investment opportunity. At this time, more than two-thirds of Americans live in a jurisdiction that has some form of legal cannabis. The country is trending toward a repeal of prohibition, but that will likely be a slow and clumsy process from a regulatory standpoint.\r\n\r\nIf you’re looking to invest in licenses and permits, consider states with a more limited number of granted permits. States that limit the number of permits make those permits more valuable by doing so. You also want to consider states that have constitutions providing for voter referendums.\r\n\r\nAs you do, you’ll notice that most states that allow for referendums are west of the Mississippi and business friendly. There’s a historical reason for that. Those states joined the union in the 19th century, and their state constitutions are based on the Spanish and French democratic models that allow voters to pass laws by referendum. As a result, and generally speaking, states with voter referendum and business-friendly regulatory environments tend to have legislation providing for some degree of legalized cannabis.\r\n<p class=\"article-tips warning\">Be careful when you’re considering investing in any company whose licenses are based on narrow zoning laws. I’ve invested in real estate that was once coveted because it was zoned for cannabis only to have the city loosen its zoning restrictions six months later. I paid a premium for the property, only to see its value drop when zoning laws made more real estate available for cannabis businesses. I could have avoided that mistake by researching more thoroughly what was on the ballot or what was being discussed by the zoning committee.</p>\r\nKeep an eye on the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act, which would amend the Controlled Substances Act (CSA) so that any state-legal cannabis activity would no longer be considered illegal under federal law.\r\n\r\nThe STATES Act would also solve the cannabis banking problem, because the federal money-laundering statute is triggered only for illegal activities. Likewise, because the 280E provision applies only to revenue generated by illegal means, cannabis businesses would be able to deduct their business expenses just like any legal business.\r\n\r\nAlthough the STATES Act has bipartisan support and was passed by a large margin in the House of Representatives, as of this writing, the bill was hung up in the Senate.\r\n<h2 id=\"tab2\" ><a name=\"_Toc45796471\"></a>The Cole Memorandum</h2>\r\nDuring the Obama administration, on August 29, 2013, U.S. Deputy Attorney General James M. Cole issued a trio of memos, including the Cole Memorandum, to all U.S. attorneys general. The memo informed them that due to limited resources, the U.S. Department of Justice would not be enforcing federal marijuana prohibition in states that legalized and effectively regulated and enforced their own marijuana laws.\r\n\r\nThe memo directed the state attorneys general to “not focus federal resources in your states on individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana.”\r\n\r\nInstead, states were encouraged to address federal priorities, for example, “by implementing effective measures to prevent diversion of marijuana outside the regulated system and to other states, prohibiting access to marijuana by minors, and replacing an illicit marijuana trade that funds criminal enterprises with a tightly regulated market in which revenues are tracked and accounted for.”\r\n\r\nThis memo was rescinded under the Trump administration in January 2018 by Attorney General Jeff Sessions. The impact of the rescission in individual states has yet to be determined, but it’s a cause for concern because it indicates that the feds may be leaning toward greater enforcement of the federal prohibition of marijuana.\r\n<h2 id=\"tab3\" >State cannabis laws</h2>\r\n<a name=\"_Toc38430801\"></a>Although cannabis is federally illegal, each state has the right to legalize it within its borders and set the rules and regulations for personal and commercial growth, production, transportation, sale, possession, and use. States fall into one of the following five categories:\r\n<ul>\r\n \t<li><strong>Fully legal:</strong> Both medicinal and adult use are allowed.</li>\r\n \t<li><strong>Fully illegal:</strong> No medicinal or adult use is allowed or decriminalized (see the final item in this list for more about decriminalization).</li>\r\n \t<li><strong>Medical and decriminalized: </strong>Medical use is legal, and possession and use is decriminalized.</li>\r\n \t<li><strong>Medical only: </strong>Marijuana is legalized only for medical use, which in some states allows only cannabidiol (CBD) oil use (CBD doesn’t contain the psychoactive ingredient THC).</li>\r\n \t<li><strong>Decriminalized: </strong>Possessing or using small amounts of marijuana will not lead to arrest, prosecution, prison time, or a criminal record (decriminalization details vary by state).</li>\r\n</ul>\r\n<p class=\"article-tips tip\">The easiest way to find out where each state in the U.S. stands on legalization is to search the web for “marijuana legal states.” You’ll see a color-coded map like the one shown. State marijuana laws change frequently, so access a map from a reliable source that has current information.</p>\r\n\r\n\r\n[caption id=\"attachment_282943\" align=\"alignnone\" width=\"556\"]<img class=\"size-full wp-image-282943\" src=\"https://www.dummies.com/wp-content/uploads/cannabis-invest-online-map.jpg\" alt=\"cannabis laws mapped out\" width=\"556\" height=\"455\" /> Check out an online map to determine overall legal status.[/caption]\r\n\r\nState laws and enforcement of those laws can negatively impact cannabis businesses and investors in several ways, including the following:\r\n<ul>\r\n \t<li>Every state in which marijuana is legal has numerous rules and regulations that apply to marijuana growers, producers, sellers, and distributors. These rules and regulations govern everything from verifying the identities of buyers to packing, labeling, and tracking products, and all of them add to the cost and complexity of doing business.</li>\r\n \t<li>Marijuana taxes vary by state, with adult-use marijuana typically taxed at a much higher rate than medical marijuana. Higher taxes add to the product cost and can drive sales to illegal sellers, negatively impacting sales for legal businesses.</li>\r\n \t<li>States vary in the number of legal cannabis businesses they allow, how much they charge for licenses, and how quickly they implement legalization, which can all impact how successful cannabis businesses are in each state.</li>\r\n \t<li>Some states require marijuana businesses to reserve large amounts of cash before applying for a license. This practice encourages <em>rolling up</em> marijuana businesses—a method that involves acquiring and merging small businesses to increase their collective value. In these states, large marijuana businesses have a distinct advantage over smaller operations.</li>\r\n \t<li>State laws may stipulate residency requirements for investors in cannabis businesses.</li>\r\n \t<li>Some states in which marijuana is legal are less stringent in enforcing laws against illegal sales, which can negatively impact sales for legal businesses.</li>\r\n</ul>\r\n<h2 id=\"tab4\" ><a name=\"_Toc38430802\"></a><a name=\"_Toc532218062\"></a><a name=\"_Toc45796472\"></a>Local laws</h2>\r\nIn states where cannabis is legal, local municipalities can separately regulate its growth, production, and sale within their borders. They are also allowed to add taxes and fees to commercial efforts above and beyond those of the state. In some cases, municipalities can completely ban commercial endeavors. For example, Colorado Springs permits medical sales but has continued to ban adult-use dispensaries. Penalties can vary significantly from one municipality to another.\r\n\r\nThese variations and costs can negatively impact the sales and profits of cannabis businesses, even in states in which cannabis is legal.\r\n<h2 id=\"tab5\" ><a name=\"_Toc45796473\"></a>Cannabis laws in other countries</h2>\r\nAs an investor, you want to know about a cannabis company’s range of operations—specifically, the countries it serves around the world. A company that operates in several countries may be less susceptible to changes in laws and regulations than a company operating in only one country. In addition, a company’s global reach reflects its ambitions for growth. Here’s a list of countries in which cannabis is legal or decriminalized to some degree:\r\n<ul>\r\n \t<li>Australia</li>\r\n \t<li>Canada</li>\r\n \t<li>Germany</li>\r\n \t<li>Italy</li>\r\n \t<li>Mexico</li>\r\n \t<li>The Netherlands</li>\r\n \t<li>New Zealand</li>\r\n \t<li>South Korea</li>\r\n \t<li>Spain</li>\r\n \t<li>Switzerland</li>\r\n \t<li>Uruguay</li>\r\n \t<li>S. Virgin Islands</li>\r\n</ul>\r\n<p class=\"article-tips remember\">Carefully research each market before investing in companies that operate in it. Examine the laws and enforcement of those laws, cannabis demand, the costs of doing business, competition from illegal sellers, and other factors to gain a better understanding of the potential for sales, profits, and growth, as well as the risks involved.</p>","blurb":"","authors":[{"authorId":33497,"name":"Steven R. Gormley","slug":"steven-r-gormley","description":"Steven Gormley is CEO at Radiko Holdings. He's a celebrated expert in the legal marijuana sector and his analyses have been featured prominently in media outlets, including Forbes, the Wall Street Journal, and Marketwatch. Gormley also is COO of Silverback Investments, Inc., a management company in the cannabis space.","_links":{"self":"https://dummies-api.dummies.com/v2/authors/33497"}}],"primaryCategoryTaxonomy":{"categoryId":34298,"title":"Stocks","slug":"stocks","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34298"}},"secondaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"tertiaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"trendingArticles":null,"inThisArticle":[{"label":"U.S. cannabis federal law and enforcement","target":"#tab1"},{"label":"The Cole Memorandum","target":"#tab2"},{"label":"State cannabis laws","target":"#tab3"},{"label":"Local laws","target":"#tab4"},{"label":"Cannabis laws in other countries","target":"#tab5"}],"relatedArticles":{"fromBook":[],"fromCategory":[{"articleId":283116,"title":"10 Reasons Not to Invest in Marijuana Stocks","slug":"10-reasons-not-to-invest-in-marijuana-stocks","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/283116"}},{"articleId":283111,"title":"11 Criteria for Choosing a Cannabis Investment","slug":"11-criteria-for-choosing-a-cannabis-investment","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/283111"}},{"articleId":283105,"title":"Cannabis Investments: Risks Inherent in Momentum Investing","slug":"cannabis-investments-risks-inherent-in-momentum-investing","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/283105"}},{"articleId":283098,"title":"Investing in Cannabis: Spotting Opportunities to Buy or Sell","slug":"investing-in-cannabis-spotting-opportunities-to-buy-or-sell","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/283098"}},{"articleId":283089,"title":"Investing in Cannabis: The Bid-Ask Spread","slug":"investing-in-cannabis-the-bid-ask-spread","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/283089"}}]},"hasRelatedBookFromSearch":false,"relatedBook":{"bookId":0,"slug":null,"isbn":null,"categoryList":null,"amazon":null,"image":null,"title":null,"testBankPinActivationLink":null,"bookOutOfPrint":false,"authorsInfo":null,"authors":null,"_links":null},"collections":[{"title":"For the Budding Cannabis Enthusiast","slug":"for-the-budding-cannabis-enthusiast","collectionId":291903}],"articleAds":{"footerAd":"<div class=\"du-ad-region row\" id=\"article_page_adhesion_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_adhesion_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;investment-vehicles&quot;,&quot;stocks&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[null]}]\" id=\"du-slot-62b36f7d4dc73\"></div></div>","rightAd":"<div class=\"du-ad-region row\" id=\"article_page_right_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_right_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;investment-vehicles&quot;,&quot;stocks&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[null]}]\" id=\"du-slot-62b36f7d4e450\"></div></div>"},"articleType":{"articleType":"Articles","articleList":null,"content":null,"videoInfo":{"videoId":null,"name":null,"accountId":null,"playerId":null,"thumbnailUrl":null,"description":null,"uploadDate":null}},"sponsorship":{"sponsorshipPage":false,"backgroundImage":{"src":null,"width":0,"height":0},"brandingLine":"","brandingLink":"","brandingLogo":{"src":null,"width":0,"height":0}},"primaryLearningPath":"Explore","lifeExpectancy":"One year","lifeExpectancySetFrom":"2022-03-31T00:00:00+00:00","dummiesForKids":"no","sponsoredContent":"no","adInfo":"","adPairKey":[]},"status":"publish","visibility":"public","articleId":282922},{"headers":{"creationTime":"2021-03-17T15:40:48+00:00","modifiedTime":"2022-03-31T14:06:51+00:00","timestamp":"2022-06-22T19:37:33+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Personal Finance","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34273"},"slug":"personal-finance","categoryId":34273},{"name":"Investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34288"},"slug":"investing","categoryId":34288},{"name":"Investment Vehicles","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34290"},"slug":"investment-vehicles","categoryId":34290},{"name":"Stocks","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34298"},"slug":"stocks","categoryId":34298}],"title":"10 Reasons Not to Invest in Marijuana Stocks","strippedTitle":"10 reasons not to invest in marijuana stocks","slug":"10-reasons-not-to-invest-in-marijuana-stocks","canonicalUrl":"","seo":{"metaDescription":"Following are 10 reasons for not investing in cannabis. Keep these reasons in mind as you seek your fortune in the green rush.","noIndex":0,"noFollow":0},"content":"You’re going to invest in cannabis. Remember that <a href=\"https://www.dummies.com/personal-finance/investing/frontier-markets/investing-in-cannabis-for-dummies-cheat-sheet/\">investing in cannabis</a> is risky business. Many people who invested years ago got the jitters, sold their shares, and lost a lot of money. Some people lost money to con artists or well-intentioned friends or family members. Others lost out because they invested in cannabis businesses that didn’t make it.\r\n\r\nHowever, as long as you’re well aware of the risks, if you decide to move forward, I applaud your bold initiative, and I hope you receive ample compensation for your risk-taking. People like you are the ones who drive innovation and fuel the success of new industries such as cannabis.\r\n\r\n[caption id=\"attachment_283117\" align=\"alignnone\" width=\"556\"]<img class=\"size-full wp-image-283117\" src=\"https://www.dummies.com/wp-content/uploads/cannabis-invest-not.jpg\" alt=\"cannabis investing\" width=\"556\" height=\"371\" /> © Poring Studio / Shutterstock.com[/caption]\r\n\r\nStill, I’m going to take this opportunity to caution you in the hopes that the risks persuade you to tread carefully — to do your homework and perform your due diligence. Savvy investors stand to earn handsome returns on their investments as long as they make smart investments. Those who rush in and are clueless and careless will lose their shirts.\r\n\r\nFollowing are 10 reasons for not investing in cannabis. Keep these reasons in mind as you seek your fortune in the green rush.\r\n<h2 id=\"tab1\" ><a name=\"_Toc47016354\"></a><a name=\"_Toc51665919\"></a>Marijuana is still federally illegal in the United States</h2>\r\nAlthough momentum seems in favor of federal legalization of marijuana sometime in the future, nobody has a crystal ball that can tell them for sure what will happen. A new study might come out revealing some currently unknown harmful effect that makes legislators who are already against legalization dig in their heels. Or, some other unforeseen event or change in culture or beliefs could cause voters to become less accepting of marijuana use. Who knows?\r\n\r\nUntil marijuana is federally legal, the federal laws against it will restrict growth in the industry in several ways, including the following:\r\n<ul>\r\n \t<li>Increase the cost of doing business</li>\r\n \t<li>Continue to fuel the black market for cannabis</li>\r\n \t<li>Complicate and increase the cost of expanding businesses across state lines and into foreign markets</li>\r\n \t<li>Make banking and other financial services less available for cannabis businesses</li>\r\n</ul>\r\nWhen you invest in cannabis, to a certain degree, you’re betting that it will ultimately become legal on a federal level. I believe that will happen, eventually, but it’s not a sure thing, and even if it were, nobody knows when it will happen.\r\n<h2 id=\"tab2\" ><a name=\"_Toc47016355\"></a><a name=\"_Toc51665920\"></a>Marijuana investment scams are rampant</h2>\r\nCon artists profit on the human desire to have a better life. Some would call that greed, but I really think most people just want to have enough money to pursue their dreams. Many people see cannabis as the next gold rush. In fact, the recent boom in legal cannabis companies has been described as a “green rush.” Everyone wants to get in on the action and not to miss out on the opportunity to profit from this exciting new industry. And that’s exactly what makes people vulnerable to scams — that and the fact that people generally trust others.\r\n\r\nCon artists know that people are eager to invest in cannabis, so whenever someone expresses this eagerness, they become a target. Of course, the threat of a scam isn’t reason enough to avoid investing in cannabis, but it is a good reason to remain skeptical of opportunities that seem too good to be true.\r\n<h2 id=\"tab3\" ><a name=\"_Toc47016356\"></a><a name=\"_Toc51665921\"></a>Earning a profit as a cannabis business is a huge challenge</h2>\r\nAs an investor, you’re wise to invest in profitable businesses or at least those that have a good chance of being highly profitable. Unfortunately, cannabis is a heavily taxed and regulated industry, which increases the costs and complexities of doing business. It’s not like selling bottled water. Here are a few line items that take a huge bite out of cannabis business profits:\r\n<ul>\r\n \t<li><strong>Taxes.</strong> Cannabis businesses are prohibited from claiming business deductions on their federal taxes. Also, the high sales and excise taxes on cannabis products reduce demand and steer sales to the black market.</li>\r\n \t<li><strong>Application and licensing fees. </strong>Application and licensing fees for legitimate cannabis businesses can be exorbitant in some states; for example, Connecticut charges a $25,000 application fee and a cultivation licensing fee of $75,000. In addition, businesses often must hire a lawyer to navigate the process.</li>\r\n \t<li><strong>Capital requirements. </strong>Many states require cannabis businesses to hold a certain minimum in liquid assets (typically hundreds of thousands of dollars) to obtain and keep their license.</li>\r\n \t<li><strong>Compliance costs. </strong>Companies often incur high legal costs and must purchase specialized software to remain compliant because most states require tracking cannabis “from seed to sale.”</li>\r\n</ul>\r\nI could go on, but the point is that earning a profit in cannabis isn’t easy, and until it becomes easier, cannabis businesses will have a tough time proving their value to investors.\r\n<h2 id=\"tab4\" ><a name=\"_Toc47016357\"></a><a name=\"_Toc51665922\"></a>Illegal operations undermine demand for legal products</h2>\r\nIn many areas where cannabis is legal, the black market continues to thrive because 1) cannabis is often cheaper on the black market where businesses don’t pay taxes or application and licensing fees and don’t incur the costs of attorneys and compliance, and 2) the cannabis community is sort of anti-establishment, so many consumers prefer to buy from unlicensed growers and dealers.\r\n\r\nIn addition, in many states in which cannabis is legal, people are allowed to grow a certain number of cannabis plants of their own. They need to buy seeds, fertilizer, and maybe the equipment to set up a grow room, which gives suppliers of those items additional business, but it decreases demand from commercial growers, manufacturers, and dispensaries.\r\n<h2 id=\"tab5\" ><a name=\"_Toc47016358\"></a><a name=\"_Toc51665923\"></a>The industry is very fragmented</h2>\r\nThe <a href=\"https://www.dummies.com/health/cannabis-for-dummies-cheat-sheet/\">cannabis industry</a> consists mostly of small businesses competing against one another, which means businesses will come and go. Some will fail, and some will succeed. Eventually, as cannabis legalization grows, large national companies will step in and either buy up competing companies or drive them out of business. People who invest in cannabis now, when the industry is fragmented, are likely to experience losses as some of the companies they “bet on” fall to the competition.\r\n<p class=\"article-tips remember\">The take-home message here is that if you’re accustomed to trading in companies listed on the major stock exchanges, such as the NYSE and Nasdaq, now may not be the best time to invest in cannabis. You may want to wait until the industry starts to consolidate; then, you’ll have an easier time predicting winners and losers.</p>\r\n\r\n<h2 id=\"tab6\" ><a name=\"_Toc47016359\"></a><a name=\"_Toc51665924\"></a>Oversupply is more likely than not</h2>\r\nMany states in which cannabis is legal face problems with oversupply — too many growers growing more cannabis than the consumers in the state want or need. Oversupply drives down prices and profits and makes companies less attractive to investors.\r\n<p class=\"article-tips remember\">Oversupply is another problem that’s at least partially due to the fact that cannabis is illegal on a federal level. If cannabis were legal federally, or if growers could at least ship their products over state lines, they’d have a larger market in which to sell and compete. As it is now, states must deal with the problem of oversupply internally, which usually means issuing fewer licenses to cultivators or charging significantly more for applications and licenses.</p>\r\n\r\n<h2 id=\"tab7\" ><a name=\"_Toc47016360\"></a><a name=\"_Toc51665925\"></a>Bad news is just around the corner</h2>\r\nTo a large degree, rumors and news drive the stock market. In fact, some investment gurus advise to “buy on the rumor and sell on the news.” With cannabis, the opportunity for bad news is pretty high. In 2018, good news (mostly a combination of hype and hope) drove share prices in cannabis companies sky high. Shortly thereafter, the bad news (mostly poor earnings reports from some of the major players) led to a massive selloff.\r\n\r\nThis boom-to-bust cycle is likely to continue because hype and hope continue to motivate investors in this industry. In addition, because cannabis is a drug, both good news about its benefits and bad news about its side effects are likely to contribute to the volatility.\r\n<p class=\"article-tips remember\">There is money to be made by investing in cannabis, but I urge you to invest with your head and not your heart. Carefully research each company’s fundamentals and be sure the share price is supported by those fundamentals.</p>\r\n\r\n<h2 id=\"tab8\" ><a name=\"_Toc47016361\"></a><a name=\"_Toc51665926\"></a>Marijuana laws are slow to change</h2>\r\nAs long as marijuana remains illegal at the federal level, many states are going to drag their feet over legalization, and local jurisdictions are going to use the federal law as an excuse to pass their own restrictions on its sale and use. When the federal prohibition of marijuana will end is anybody’s guess. I think it’s likely to happen the next time the Democrats control the White House and Congress, which might happen before this book is published, four years later, or maybe even a much longer time from now.\r\n<h2 id=\"tab9\" ><a name=\"_Toc47016362\"></a><a name=\"_Toc51665927\"></a>Company shares are being diluted</h2>\r\nCompanies can secure financing through debt (borrowing) or equity (selling shares in the company), which is true of all companies. What’s different about cannabis companies is that they have trouble securing loans from banks, so they have to rely more on equity. When they get in a financial pinch, if they can’t get a loan, they need to sell more shares, and the more shares they sell, the more diluted the price of existing shares becomes. Unfortunately, investors have little control over decisions to issue more shares, even though that decision impacts the value of their investment.\r\n<p class=\"article-tips remember\">Shares can be diluted in any sector, any industry, and any company, but the possibility is higher among cannabis companies.</p>\r\n\r\n<h2 id=\"tab10\" ><a name=\"_Toc47016363\"></a><a name=\"_Toc51665928\"></a>Demand is unpredictable</h2>\r\nSeveral states that have legalized marijuana are finding that demand can be unpredictable for a variety of reasons, including the following:\r\n<ul>\r\n \t<li>Cross-border sales may increase demand for marijuana in legal states surrounded by illegal states. However, when bordering states legalize it, cross-border sales decline.</li>\r\n \t<li>Any black-market sales reduce demand for legal cannabis.</li>\r\n \t<li>Any bad news about negative side effects reduces demand, although the drop in demand is usually short-lived.</li>\r\n</ul>\r\n<p class=\"article-tips remember\">Whether demand for cannabis will increase or decrease with its legalization is hotly debated. I think demand is almost certain to rise with legalization, but others think it could fall as marijuana loses its appeal as a “forbidden fruit.”</p>","description":"You’re going to invest in cannabis. Remember that <a href=\"https://www.dummies.com/personal-finance/investing/frontier-markets/investing-in-cannabis-for-dummies-cheat-sheet/\">investing in cannabis</a> is risky business. Many people who invested years ago got the jitters, sold their shares, and lost a lot of money. Some people lost money to con artists or well-intentioned friends or family members. Others lost out because they invested in cannabis businesses that didn’t make it.\r\n\r\nHowever, as long as you’re well aware of the risks, if you decide to move forward, I applaud your bold initiative, and I hope you receive ample compensation for your risk-taking. People like you are the ones who drive innovation and fuel the success of new industries such as cannabis.\r\n\r\n[caption id=\"attachment_283117\" align=\"alignnone\" width=\"556\"]<img class=\"size-full wp-image-283117\" src=\"https://www.dummies.com/wp-content/uploads/cannabis-invest-not.jpg\" alt=\"cannabis investing\" width=\"556\" height=\"371\" /> © Poring Studio / Shutterstock.com[/caption]\r\n\r\nStill, I’m going to take this opportunity to caution you in the hopes that the risks persuade you to tread carefully — to do your homework and perform your due diligence. Savvy investors stand to earn handsome returns on their investments as long as they make smart investments. Those who rush in and are clueless and careless will lose their shirts.\r\n\r\nFollowing are 10 reasons for not investing in cannabis. Keep these reasons in mind as you seek your fortune in the green rush.\r\n<h2 id=\"tab1\" ><a name=\"_Toc47016354\"></a><a name=\"_Toc51665919\"></a>Marijuana is still federally illegal in the United States</h2>\r\nAlthough momentum seems in favor of federal legalization of marijuana sometime in the future, nobody has a crystal ball that can tell them for sure what will happen. A new study might come out revealing some currently unknown harmful effect that makes legislators who are already against legalization dig in their heels. Or, some other unforeseen event or change in culture or beliefs could cause voters to become less accepting of marijuana use. Who knows?\r\n\r\nUntil marijuana is federally legal, the federal laws against it will restrict growth in the industry in several ways, including the following:\r\n<ul>\r\n \t<li>Increase the cost of doing business</li>\r\n \t<li>Continue to fuel the black market for cannabis</li>\r\n \t<li>Complicate and increase the cost of expanding businesses across state lines and into foreign markets</li>\r\n \t<li>Make banking and other financial services less available for cannabis businesses</li>\r\n</ul>\r\nWhen you invest in cannabis, to a certain degree, you’re betting that it will ultimately become legal on a federal level. I believe that will happen, eventually, but it’s not a sure thing, and even if it were, nobody knows when it will happen.\r\n<h2 id=\"tab2\" ><a name=\"_Toc47016355\"></a><a name=\"_Toc51665920\"></a>Marijuana investment scams are rampant</h2>\r\nCon artists profit on the human desire to have a better life. Some would call that greed, but I really think most people just want to have enough money to pursue their dreams. Many people see cannabis as the next gold rush. In fact, the recent boom in legal cannabis companies has been described as a “green rush.” Everyone wants to get in on the action and not to miss out on the opportunity to profit from this exciting new industry. And that’s exactly what makes people vulnerable to scams — that and the fact that people generally trust others.\r\n\r\nCon artists know that people are eager to invest in cannabis, so whenever someone expresses this eagerness, they become a target. Of course, the threat of a scam isn’t reason enough to avoid investing in cannabis, but it is a good reason to remain skeptical of opportunities that seem too good to be true.\r\n<h2 id=\"tab3\" ><a name=\"_Toc47016356\"></a><a name=\"_Toc51665921\"></a>Earning a profit as a cannabis business is a huge challenge</h2>\r\nAs an investor, you’re wise to invest in profitable businesses or at least those that have a good chance of being highly profitable. Unfortunately, cannabis is a heavily taxed and regulated industry, which increases the costs and complexities of doing business. It’s not like selling bottled water. Here are a few line items that take a huge bite out of cannabis business profits:\r\n<ul>\r\n \t<li><strong>Taxes.</strong> Cannabis businesses are prohibited from claiming business deductions on their federal taxes. Also, the high sales and excise taxes on cannabis products reduce demand and steer sales to the black market.</li>\r\n \t<li><strong>Application and licensing fees. </strong>Application and licensing fees for legitimate cannabis businesses can be exorbitant in some states; for example, Connecticut charges a $25,000 application fee and a cultivation licensing fee of $75,000. In addition, businesses often must hire a lawyer to navigate the process.</li>\r\n \t<li><strong>Capital requirements. </strong>Many states require cannabis businesses to hold a certain minimum in liquid assets (typically hundreds of thousands of dollars) to obtain and keep their license.</li>\r\n \t<li><strong>Compliance costs. </strong>Companies often incur high legal costs and must purchase specialized software to remain compliant because most states require tracking cannabis “from seed to sale.”</li>\r\n</ul>\r\nI could go on, but the point is that earning a profit in cannabis isn’t easy, and until it becomes easier, cannabis businesses will have a tough time proving their value to investors.\r\n<h2 id=\"tab4\" ><a name=\"_Toc47016357\"></a><a name=\"_Toc51665922\"></a>Illegal operations undermine demand for legal products</h2>\r\nIn many areas where cannabis is legal, the black market continues to thrive because 1) cannabis is often cheaper on the black market where businesses don’t pay taxes or application and licensing fees and don’t incur the costs of attorneys and compliance, and 2) the cannabis community is sort of anti-establishment, so many consumers prefer to buy from unlicensed growers and dealers.\r\n\r\nIn addition, in many states in which cannabis is legal, people are allowed to grow a certain number of cannabis plants of their own. They need to buy seeds, fertilizer, and maybe the equipment to set up a grow room, which gives suppliers of those items additional business, but it decreases demand from commercial growers, manufacturers, and dispensaries.\r\n<h2 id=\"tab5\" ><a name=\"_Toc47016358\"></a><a name=\"_Toc51665923\"></a>The industry is very fragmented</h2>\r\nThe <a href=\"https://www.dummies.com/health/cannabis-for-dummies-cheat-sheet/\">cannabis industry</a> consists mostly of small businesses competing against one another, which means businesses will come and go. Some will fail, and some will succeed. Eventually, as cannabis legalization grows, large national companies will step in and either buy up competing companies or drive them out of business. People who invest in cannabis now, when the industry is fragmented, are likely to experience losses as some of the companies they “bet on” fall to the competition.\r\n<p class=\"article-tips remember\">The take-home message here is that if you’re accustomed to trading in companies listed on the major stock exchanges, such as the NYSE and Nasdaq, now may not be the best time to invest in cannabis. You may want to wait until the industry starts to consolidate; then, you’ll have an easier time predicting winners and losers.</p>\r\n\r\n<h2 id=\"tab6\" ><a name=\"_Toc47016359\"></a><a name=\"_Toc51665924\"></a>Oversupply is more likely than not</h2>\r\nMany states in which cannabis is legal face problems with oversupply — too many growers growing more cannabis than the consumers in the state want or need. Oversupply drives down prices and profits and makes companies less attractive to investors.\r\n<p class=\"article-tips remember\">Oversupply is another problem that’s at least partially due to the fact that cannabis is illegal on a federal level. If cannabis were legal federally, or if growers could at least ship their products over state lines, they’d have a larger market in which to sell and compete. As it is now, states must deal with the problem of oversupply internally, which usually means issuing fewer licenses to cultivators or charging significantly more for applications and licenses.</p>\r\n\r\n<h2 id=\"tab7\" ><a name=\"_Toc47016360\"></a><a name=\"_Toc51665925\"></a>Bad news is just around the corner</h2>\r\nTo a large degree, rumors and news drive the stock market. In fact, some investment gurus advise to “buy on the rumor and sell on the news.” With cannabis, the opportunity for bad news is pretty high. In 2018, good news (mostly a combination of hype and hope) drove share prices in cannabis companies sky high. Shortly thereafter, the bad news (mostly poor earnings reports from some of the major players) led to a massive selloff.\r\n\r\nThis boom-to-bust cycle is likely to continue because hype and hope continue to motivate investors in this industry. In addition, because cannabis is a drug, both good news about its benefits and bad news about its side effects are likely to contribute to the volatility.\r\n<p class=\"article-tips remember\">There is money to be made by investing in cannabis, but I urge you to invest with your head and not your heart. Carefully research each company’s fundamentals and be sure the share price is supported by those fundamentals.</p>\r\n\r\n<h2 id=\"tab8\" ><a name=\"_Toc47016361\"></a><a name=\"_Toc51665926\"></a>Marijuana laws are slow to change</h2>\r\nAs long as marijuana remains illegal at the federal level, many states are going to drag their feet over legalization, and local jurisdictions are going to use the federal law as an excuse to pass their own restrictions on its sale and use. When the federal prohibition of marijuana will end is anybody’s guess. I think it’s likely to happen the next time the Democrats control the White House and Congress, which might happen before this book is published, four years later, or maybe even a much longer time from now.\r\n<h2 id=\"tab9\" ><a name=\"_Toc47016362\"></a><a name=\"_Toc51665927\"></a>Company shares are being diluted</h2>\r\nCompanies can secure financing through debt (borrowing) or equity (selling shares in the company), which is true of all companies. What’s different about cannabis companies is that they have trouble securing loans from banks, so they have to rely more on equity. When they get in a financial pinch, if they can’t get a loan, they need to sell more shares, and the more shares they sell, the more diluted the price of existing shares becomes. Unfortunately, investors have little control over decisions to issue more shares, even though that decision impacts the value of their investment.\r\n<p class=\"article-tips remember\">Shares can be diluted in any sector, any industry, and any company, but the possibility is higher among cannabis companies.</p>\r\n\r\n<h2 id=\"tab10\" ><a name=\"_Toc47016363\"></a><a name=\"_Toc51665928\"></a>Demand is unpredictable</h2>\r\nSeveral states that have legalized marijuana are finding that demand can be unpredictable for a variety of reasons, including the following:\r\n<ul>\r\n \t<li>Cross-border sales may increase demand for marijuana in legal states surrounded by illegal states. However, when bordering states legalize it, cross-border sales decline.</li>\r\n \t<li>Any black-market sales reduce demand for legal cannabis.</li>\r\n \t<li>Any bad news about negative side effects reduces demand, although the drop in demand is usually short-lived.</li>\r\n</ul>\r\n<p class=\"article-tips remember\">Whether demand for cannabis will increase or decrease with its legalization is hotly debated. I think demand is almost certain to rise with legalization, but others think it could fall as marijuana loses its appeal as a “forbidden fruit.”</p>","blurb":"","authors":[{"authorId":33497,"name":"Steven R. Gormley","slug":"steven-r-gormley","description":"Steven Gormley is CEO at Radiko Holdings. He's a celebrated expert in the legal marijuana sector and his analyses have been featured prominently in media outlets, including Forbes, the Wall Street Journal, and Marketwatch. Gormley also is COO of Silverback Investments, Inc., a management company in the cannabis space.","_links":{"self":"https://dummies-api.dummies.com/v2/authors/33497"}}],"primaryCategoryTaxonomy":{"categoryId":34298,"title":"Stocks","slug":"stocks","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34298"}},"secondaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"tertiaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"trendingArticles":null,"inThisArticle":[{"label":"Marijuana is still federally illegal in the United States","target":"#tab1"},{"label":"Marijuana investment scams are rampant","target":"#tab2"},{"label":"Earning a profit as a cannabis business is a huge challenge","target":"#tab3"},{"label":"Illegal operations undermine demand for legal products","target":"#tab4"},{"label":"The industry is very fragmented","target":"#tab5"},{"label":"Oversupply is more likely than not","target":"#tab6"},{"label":"Bad news is just around the corner","target":"#tab7"},{"label":"Marijuana laws are slow to change","target":"#tab8"},{"label":"Company shares are being diluted","target":"#tab9"},{"label":"Demand is unpredictable","target":"#tab10"}],"relatedArticles":{"fromBook":[],"fromCategory":[{"articleId":283111,"title":"11 Criteria for Choosing a Cannabis Investment","slug":"11-criteria-for-choosing-a-cannabis-investment","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/283111"}},{"articleId":283105,"title":"Cannabis Investments: Risks Inherent in Momentum Investing","slug":"cannabis-investments-risks-inherent-in-momentum-investing","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/283105"}},{"articleId":283098,"title":"Investing in Cannabis: Spotting Opportunities to Buy or Sell","slug":"investing-in-cannabis-spotting-opportunities-to-buy-or-sell","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/283098"}},{"articleId":283089,"title":"Investing in Cannabis: The Bid-Ask Spread","slug":"investing-in-cannabis-the-bid-ask-spread","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/283089"}},{"articleId":282966,"title":"Over-the-Counter Marijuana Stocks","slug":"over-the-counter-marijuana-stocks","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/282966"}}]},"hasRelatedBookFromSearch":false,"relatedBook":{"bookId":0,"slug":null,"isbn":null,"categoryList":null,"amazon":null,"image":null,"title":null,"testBankPinActivationLink":null,"bookOutOfPrint":false,"authorsInfo":null,"authors":null,"_links":null},"collections":[],"articleAds":{"footerAd":"<div class=\"du-ad-region row\" id=\"article_page_adhesion_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_adhesion_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;investment-vehicles&quot;,&quot;stocks&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[null]}]\" id=\"du-slot-62b36f7d30e87\"></div></div>","rightAd":"<div class=\"du-ad-region row\" id=\"article_page_right_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_right_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;investment-vehicles&quot;,&quot;stocks&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[null]}]\" id=\"du-slot-62b36f7d315eb\"></div></div>"},"articleType":{"articleType":"Articles","articleList":null,"content":null,"videoInfo":{"videoId":null,"name":null,"accountId":null,"playerId":null,"thumbnailUrl":null,"description":null,"uploadDate":null}},"sponsorship":{"sponsorshipPage":false,"backgroundImage":{"src":null,"width":0,"height":0},"brandingLine":"","brandingLink":"","brandingLogo":{"src":null,"width":0,"height":0}},"primaryLearningPath":"Advance","lifeExpectancy":"One year","lifeExpectancySetFrom":"2022-03-31T00:00:00+00:00","dummiesForKids":"no","sponsoredContent":"no","adInfo":"","adPairKey":[]},"status":"publish","visibility":"public","articleId":283116}],"_links":{"self":{"self":"https://dummies-api.dummies.com/v2/categories/34288/categoryArticles?sortField=time&sortOrder=1&size=10&offset=0"},"next":{"self":"https://dummies-api.dummies.com/v2/categories/34288/categoryArticles?sortField=time&sortOrder=1&size=10&offset=10"},"last":{"self":"https://dummies-api.dummies.com/v2/categories/34288/categoryArticles?sortField=time&sortOrder=1&size=10&offset=1540"}}},"objectTitle":"","status":"success","pageType":"article-category","objectId":"34288","page":1,"sortField":"time","sortOrder":1,"categoriesIds":[],"articleTypes":[],"filterData":{"categoriesFilter":[{"itemId":0,"itemName":"All Categories","count":1550},{"itemId":34353,"itemName":"Day Trading","count":71},{"itemId":34289,"itemName":"Energy","count":85},{"itemId":34300,"itemName":"General Investing","count":286},{"itemId":34288,"itemName":"Investing","count":2},{"itemId":34290,"itemName":"Investment Vehicles","count":1071},{"itemId":34299,"itemName":"Real Estate","count":35}],"articleTypeFilter":[{"articleType":"All Types","count":1550},{"articleType":"Articles","count":1496},{"articleType":"Cheat Sheet","count":50},{"articleType":"Step by Step","count":3},{"articleType":"Videos","count":1}]},"filterDataLoadedStatus":"success","pageSize":10},"adsState":{"pageScripts":{"headers":{"timestamp":"2022-06-23T12:59:04+00:00"},"adsId":0,"data":{"scripts":[{"pages":["all"],"location":"header","script":"<!--Optimizely Script-->\r\n<script src=\"https://cdn.optimizely.com/js/10563184655.js\"></script>","enabled":false},{"pages":["all"],"location":"header","script":"<!-- comScore Tag -->\r\n<script>var _comscore = _comscore || [];_comscore.push({ c1: \"2\", c2: \"15097263\" });(function() {var s = document.createElement(\"script\"), el = document.getElementsByTagName(\"script\")[0]; s.async = true;s.src = (document.location.protocol == \"https:\" ? \"https://sb\" : \"http://b\") + \".scorecardresearch.com/beacon.js\";el.parentNode.insertBefore(s, el);})();</script><noscript><img src=\"https://sb.scorecardresearch.com/p?c1=2&c2=15097263&cv=2.0&cj=1\" /></noscript>\r\n<!-- / comScore Tag -->","enabled":true},{"pages":["all"],"location":"footer","script":"<!--BEGIN QUALTRICS WEBSITE FEEDBACK SNIPPET-->\r\n<script type='text/javascript'>\r\n(function(){var g=function(e,h,f,g){\r\nthis.get=function(a){for(var a=a+\"=\",c=document.cookie.split(\";\"),b=0,e=c.length;b<e;b++){for(var d=c[b];\" \"==d.charAt(0);)d=d.substring(1,d.length);if(0==d.indexOf(a))return d.substring(a.length,d.length)}return null};\r\nthis.set=function(a,c){var b=\"\",b=new Date;b.setTime(b.getTime()+6048E5);b=\"; expires=\"+b.toGMTString();document.cookie=a+\"=\"+c+b+\"; path=/; \"};\r\nthis.check=function(){var a=this.get(f);if(a)a=a.split(\":\");else if(100!=e)\"v\"==h&&(e=Math.random()>=e/100?0:100),a=[h,e,0],this.set(f,a.join(\":\"));else return!0;var c=a[1];if(100==c)return!0;switch(a[0]){case \"v\":return!1;case \"r\":return c=a[2]%Math.floor(100/c),a[2]++,this.set(f,a.join(\":\")),!c}return!0};\r\nthis.go=function(){if(this.check()){var a=document.createElement(\"script\");a.type=\"text/javascript\";a.src=g;document.body&&document.body.appendChild(a)}};\r\nthis.start=function(){var t=this;\"complete\"!==document.readyState?window.addEventListener?window.addEventListener(\"load\",function(){t.go()},!1):window.attachEvent&&window.attachEvent(\"onload\",function(){t.go()}):t.go()};};\r\ntry{(new g(100,\"r\",\"QSI_S_ZN_5o5yqpvMVjgDOuN\",\"https://zn5o5yqpvmvjgdoun-wiley.siteintercept.qualtrics.com/SIE/?Q_ZID=ZN_5o5yqpvMVjgDOuN\")).start()}catch(i){}})();\r\n</script><div id='ZN_5o5yqpvMVjgDOuN'><!--DO NOT REMOVE-CONTENTS PLACED HERE--></div>\r\n<!--END WEBSITE FEEDBACK SNIPPET-->","enabled":false},{"pages":["all"],"location":"header","script":"<!-- Hotjar Tracking Code for http://www.dummies.com -->\r\n<script>\r\n (function(h,o,t,j,a,r){\r\n h.hj=h.hj||function(){(h.hj.q=h.hj.q||[]).push(arguments)};\r\n h._hjSettings={hjid:257151,hjsv:6};\r\n a=o.getElementsByTagName('head')[0];\r\n r=o.createElement('script');r.async=1;\r\n r.src=t+h._hjSettings.hjid+j+h._hjSettings.hjsv;\r\n a.appendChild(r);\r\n })(window,document,'https://static.hotjar.com/c/hotjar-','.js?sv=');\r\n</script>","enabled":false},{"pages":["article"],"location":"header","script":"<!-- //Connect Container: dummies --> <script src=\"//get.s-onetag.com/bffe21a1-6bb8-4928-9449-7beadb468dae/tag.min.js\" async defer></script>","enabled":true},{"pages":["homepage"],"location":"header","script":"<meta name=\"facebook-domain-verification\" content=\"irk8y0irxf718trg3uwwuexg6xpva0\" />","enabled":true},{"pages":["homepage","article","category","search"],"location":"footer","script":"<!-- Facebook Pixel Code -->\r\n<noscript>\r\n<img height=\"1\" width=\"1\" src=\"https://www.facebook.com/tr?id=256338321977984&ev=PageView&noscript=1\"/>\r\n</noscript>\r\n<!-- End Facebook Pixel Code -->","enabled":true}]}},"pageScriptsLoadedStatus":"success"},"navigationState":{"navigationCollections":[{"collectionId":287568,"title":"BYOB (Be Your Own Boss)","hasSubCategories":false,"url":"/collection/for-the-entry-level-entrepreneur-287568"},{"collectionId":293237,"title":"Be a Rad Dad","hasSubCategories":false,"url":"/collection/be-the-best-dad-293237"},{"collectionId":287563,"title":"For Those Seeking Peace of Mind","hasSubCategories":false,"url":"/collection/for-those-seeking-peace-of-mind-287563"},{"collectionId":287570,"title":"For the Aspiring Aficionado","hasSubCategories":false,"url":"/collection/for-the-bougielicious-287570"},{"collectionId":291903,"title":"For the Budding Cannabis Enthusiast","hasSubCategories":false,"url":"/collection/for-the-budding-cannabis-enthusiast-291903"},{"collectionId":291934,"title":"For the Exam-Season Crammer","hasSubCategories":false,"url":"/collection/for-the-exam-season-crammer-291934"},{"collectionId":287569,"title":"For the Hopeless Romantic","hasSubCategories":false,"url":"/collection/for-the-hopeless-romantic-287569"},{"collectionId":287567,"title":"For the Unabashed Hippie","hasSubCategories":false,"url":"/collection/for-the-unabashed-hippie-287567"},{"collectionId":292186,"title":"Just DIY It","hasSubCategories":false,"url":"/collection/just-diy-it-292186"},{"collectionId":290164,"title":"Make a Commitment to Better Yourself","hasSubCategories":false,"url":"/collection/make-a-commitment-to-better-yourself-290164"}],"navigationCollectionsLoadedStatus":"success","navigationCategories":{"books":{"0":{"data":[{"categoryId":33512,"title":"Technology","hasSubCategories":true,"url":"/category/books/technology-33512"},{"categoryId":33662,"title":"Academics & The Arts","hasSubCategories":true,"url":"/category/books/academics-the-arts-33662"},{"categoryId":33809,"title":"Home, Auto, & Hobbies","hasSubCategories":true,"url":"/category/books/home-auto-hobbies-33809"},{"categoryId":34038,"title":"Body, Mind, & Spirit","hasSubCategories":true,"url":"/category/books/body-mind-spirit-34038"},{"categoryId":34224,"title":"Business, Careers, & Money","hasSubCategories":true,"url":"/category/books/business-careers-money-34224"}],"breadcrumbs":[],"categoryTitle":"Level 0 Category","mainCategoryUrl":"/category/books/level-0-category-0"}},"articles":{"0":{"data":[{"categoryId":33512,"title":"Technology","hasSubCategories":true,"url":"/category/articles/technology-33512"},{"categoryId":33662,"title":"Academics & The Arts","hasSubCategories":true,"url":"/category/articles/academics-the-arts-33662"},{"categoryId":33809,"title":"Home, Auto, & Hobbies","hasSubCategories":true,"url":"/category/articles/home-auto-hobbies-33809"},{"categoryId":34038,"title":"Body, Mind, & Spirit","hasSubCategories":true,"url":"/category/articles/body-mind-spirit-34038"},{"categoryId":34224,"title":"Business, Careers, & Money","hasSubCategories":true,"url":"/category/articles/business-careers-money-34224"}],"breadcrumbs":[],"categoryTitle":"Level 0 Category","mainCategoryUrl":"/category/articles/level-0-category-0"}}},"navigationCategoriesLoadedStatus":"success"},"searchState":{"searchList":[],"searchStatus":"initial","relatedArticlesList":[],"relatedArticlesStatus":"initial"},"routeState":{"name":"ArticleCategory","path":"/category/articles/investing-34288/","hash":"","query":{},"params":{"category":"investing-34288"},"fullPath":"/category/articles/investing-34288/","meta":{"routeType":"category","breadcrumbInfo":{"suffix":"Articles","baseRoute":"/category/articles"},"prerenderWithAsyncData":true},"from":{"name":null,"path":"/","hash":"","query":{},"params":{},"fullPath":"/","meta":{}}},"sfmcState":{"newsletterSignupStatus":"initial"}}
Logo
  • Articles Open Article Categories
  • Books Open Book Categories
  • Collections Open Collections list
  • Custom Solutions

Article Categories

Book Categories

Collections

Explore all collections
BYOB (Be Your Own Boss)
Be a Rad Dad
For Those Seeking Peace of Mind
For the Aspiring Aficionado
For the Budding Cannabis Enthusiast
For the Exam-Season Crammer
For the Hopeless Romantic
For the Unabashed Hippie
Just DIY It
Make a Commitment to Better Yourself
  • Home
  • Business, Careers, & Money Articles
  • Personal Finance Articles
  • Investing Articles

Investing Articles

Ever heard the expression, "It takes money to make money"? We'll teach you how to go from rags to riches (or from riches to even more riches) in stocks, bonds, real estate, and more.

Browse By Category

Energy

Investment Vehicles

Real Estate

General Investing

Day Trading

Previous slideNext slide

Energy

Investment Vehicles

Real Estate

General Investing

Day Trading

Articles From Investing

page 1
page 2
page 3
page 4
page 5
page 6
page 7
page 8
page 9
page 10
page 11
page 12
page 13
page 14
page 15
page 16
page 17
page 18
page 19
page 20
page 21
page 22
page 23
page 24
page 25
page 26
page 27
page 28
page 29
page 30
page 31
page 32
page 33
page 34
page 35
page 36
page 37
page 38
page 39
page 40
page 41
page 42
page 43
page 44
page 45
page 46
page 47
page 48
page 49
page 50
page 51
page 52
page 53
page 54
page 55
page 56
page 57
page 58
page 59
page 60
page 61
page 62
page 63
page 64
page 65
page 66
page 67
page 68
page 69
page 70
page 71
page 72
page 73
page 74
page 75
page 76
page 77
page 78
page 79
page 80
page 81
page 82
page 83
page 84
page 85
page 86
page 87
page 88
page 89
page 90
page 91
page 92
page 93
page 94
page 95
page 96
page 97
page 98
page 99
page 100
page 101
page 102
page 103
page 104
page 105
page 106
page 107
page 108
page 109
page 110
page 111
page 112
page 113
page 114
page 115
page 116
page 117
page 118
page 119
page 120
page 121
page 122
page 123
page 124
page 125
page 126
page 127
page 128
page 129
page 130
page 131
page 132
page 133
page 134
page 135
page 136
page 137
page 138
page 139
page 140
page 141
page 142
page 143
page 144
page 145
page 146
page 147
page 148
page 149
page 150
page 151
page 152
page 153
page 154
page 155

Filter Results

1,550 results
1,550 results
General Investing First Priorities: Paying Off High-Cost Debt and Building a Safety Reserve

Article / Updated 05-27-2022

Plenty of younger folks have debts to pay and lack an emergency reserve of money for unexpected expenses. High-cost debts, such as on a credit card, can be a major impediment to investing, in particular, and accomplishing your future personal and financial goals, in a broader sense. A high interest rate keeps the debt growing and can cause your debt to spiral out of control, which is why dealing with such consumer debt should be your first priority, just before establishing an emergency reserve. Pay off high-cost consumer debt Paying down debts isn’t nearly as exciting as investing, but it can make your investment decisions less difficult. Rather than spending your time investigating specific investments, paying off your debts with money you’ve saved may indeed be your best investment. Consumer debt includes borrowing on credit cards, auto loans, and the like, which are often costly ways to borrow. Banks and other lenders charge higher interest rates for consumer debt than for debt for investments, such as real estate and business, because consumer loans are the riskiest type of loans for a lender. Risk means the chance of the borrower’s defaulting and being unable to pay back all that he or she borrowed. Many folks have credit card debt that costs 18 percent or more per year in interest. Some credit cards levy interest rates well above 20 percent if you make a late payment or two. Reducing and eventually eliminating this debt with your savings is like putting your money in an investment with a guaranteed tax-free return equal to the rate that you pay on your debt. For example, if you have outstanding credit card debt at 18 percent interest, paying off that debt is the same as putting your money to work in an investment with a guaranteed 18 percent tax-free annual return. Because the interest on consumer debt isn’t tax-deductible, you would need to earn more than 18 percent by investing your money elsewhere to net 18 percent after paying taxes. Earning such high investing returns is highly unlikely, and to earn those returns, you’d be forced to take great risk. Consumer debt is hazardous to your long-term financial health (not to mention damaging to your credit score and future ability to borrow for a home or otherwise investments) because it encourages you to borrow against your future earnings. Tapping credit card debt may make sense if you’re financing a business. If you don’t have home equity, personal loans (through a credit card or auto loan) may actually be your lowest-cost source of small-business financing. Establish an emergency reserve You never know what life will bring, so having an accessible reserve of cash to meet unexpected expenses makes good financial sense. If you have generous parents or dear relatives, you can certainly consider using them as your emergency reserve. Just be sure you ask them in advance how they feel about that before you count on receiving funding from them. If you don’t have a financially flush family member, the onus is on you to establish a reserve. You should have at least three months’ worth of living expenses to as much as six months’ worth of living expenses as an emergency reserve. Invest this personal-safety-net money in a money market fund. You may also be able to borrow against your employer-based retirement account or against your home equity, should you find yourself in a bind, but these options are much less desirable. If you don’t have a financial safety net, you may be forced, under duress, to sell an investment (at a relatively low price) that you’ve worked hard for. And selling some investments, such as real estate, can take time and cost significant money (transaction costs, taxes, and so on). Riskier investments like stocks aren’t a suitable place to keep your emergency money invested. While stocks historically have returned about 9 percent per year, about one-third of the time, stocks decline in value in a given year, sometimes substantially. Stocks can drop and have dropped 20, 30, or 50 percent or more over relatively short periods of time. Suppose that such a decline coincides with an emergency, such as the loss of your job or a health problem that creates major medical bills. Your situation may force you to sell at a loss, perhaps a substantial one. Stocks are intended to be a longer-term investment, not an investment that you expect (or need) to sell in the near future.

View Article
Investment Vehicles Tips for Working with Trend-Following Trading Systems

Article / Updated 05-26-2022

Many trend‐following trading systems use a moving average for their starting points. In this trend‐following example, the system is designed for position trading, which means you use a relatively long moving average. Short selling isn’t permitted with this simple system. The first step is to define buy and sell rules for your initial testing. The actual code for defining these rules depends on your specific system‐development package. Therefore, trading rules are described as generally as possible. The rules for an initial test may look like this: Buy at tomorrow’s opening price when today’s price crosses and closes above the 50‐day exponential moving average (EMA). Sell at tomorrow’s opening price when today’s price crosses and closes below the 50‐day EMA. To test whether using a moving average as a starting point is a good idea in a trend‐following system, apply these two rules to ten years of historical data for the stocks of your choice. After testing this idea, you find that this simple system works fairly well when stock prices are trending, but it’s likely to trigger many losing trades when the prices of stocks are range bound. You can try to avoid these losing trades, and possibly improve your overall trading results, by filtering out trading‐range situations. One way to accomplish that goal is by changing the buy rule to read as follows: Buy at tomorrow’s open when the following conditions are true: Today’s closing price is above the 50‐day EMA. The stock crossed above the 50‐day EMA sometime during the last 5 days. Today’s 50‐day EMA is greater than the 50‐day EMA from 5 days ago. These added conditions serve as signal confirmation. When you test these rules, you find they reduce the number of whipsaw trades for most stocks, but they’re also likely to delay buy and sell signals on profitable trades and thus usually result in smaller profits on those trades. However, this adjustment makes the overall system more profitable because the number of losses is reduced. You can find out whether other changes that you can make in your simple system can actually improve profitability. You may, for example, test different types of moving averages. Try, for example, a simple moving average (SMA) instead of an exponential moving average (EMA). Or you may want to try using different time frames for your moving average, such as 9‐day, 25‐day, or 100‐day moving ­averages. Identifying system‐optimization pitfalls Most system‐development and testing software comes equipped with a provision for system optimization, which allows you to fine‐tune the technical analysis tools used in your trading system. You can, for example, tell the system to find the time frame of the moving average that produces the highest profit for one stock and then ask it to do the same thing for a different stock. Some systems enable you to test this factor simultaneously for many stocks. Although this approach is alluring, using it is likely to cause you trouble. If you find, for example, that a 22‐day moving average works best for one stock, a 37‐day moving average works best for the next stock, and another stock performs best using a 74‐day moving average, you’re going to run into problems. The set of circumstances leading to these optimized results won’t likely repeat in precisely the same way again in the future. It’s almost guaranteed that whatever optimized parameters you may find for these moving averages won’t be the optimal choices when trading real capital. This is a simple example of a problem that’s well known to scientists and economists who build mathematic models to forecast future events. It’s called curve fitting because you’re molding your model to fit the historical data. You can expend quite a bit of effort fine‐tuning a system to identify all the major trends and turning points in historical data for a particular stock, but that effort isn’t likely to result in future trading profits. In that case, your optimized system is more likely to cause a long string of losses rather than profits. Testing a long moving average and comparing the results to a short moving average is fine, and so is testing a few points in between a long moving average and a short moving average. As long as you use this exercise to understand why short moving averages work best for short‐term trades and why longer moving averages work better for traders with longer trading horizons, you’ll be fine. Otherwise, you’re probably moving into the realm of curve fitting and becoming frustrated with your actual trading results. Testing with blind simulation Blind simulation is a method for setting aside enough historical data so you can test your system‐optimization results and avoid the problem of curve fitting. For example, you may test data from 1990 through 1999 and thus exclude data from 2000 through the present. After you’ve developed a system that looks good enough for you to base your trades on, you can then test your system against the data that was excluded. If the system performs as well with the excluded data as it did with the original test data, you may have a system worth trading. If it fails, you obviously need to rethink your system. Another approach is choosing your historical data with extreme care. You can expect trend‐following systems like a moving‐average system to perform well during long, powerful trends. If your stock had a strong run up during the long‐lasting 1990s bull market, that kind of price data can skew your results, magically making any trend‐following system appear profitable. Whether that success actually can be duplicated during a subsequent bull market, however, must first be thoroughly tested. If the majority of your profits come from a single trade or only a small number of trades, the system probably won’t perform well when you begin trading real money. You may want to address this problem by excluding periods from your test data when your stock was doing exceptionally well or when the results of any trades were significantly more profitable than the average trade. This technique is a valid approach to eliminating the extraordinary results arising from extraordinary situations in your historical data. Using it should give you a better idea of your system’s potential for generating real profits in the future.

View Article
Stocks Candlestick Charting For Dummies Cheat Sheet

Cheat Sheet / Updated 05-03-2022

Make smart trading decisions using candlestick charting. This cheat sheet shows you how to read the data that makes up a candlestick chart, figure out how to analyze a candlestick chart, and identify some common candlestick patterns.

View Cheat Sheet
Commodities Commodities For Dummies Cheat Sheet

Cheat Sheet / Updated 05-03-2022

The major commodities exchanges trade specific commodities worldwide, and the main regulatory organizations provide information and enforce codes to protect commodities investors. When investing in commodities, use guidelines and advice from the experts to lower your risks.

View Cheat Sheet
General Investing Dark Pools and High Frequency Trading For Dummies Cheat Sheet

Cheat Sheet / Updated 05-02-2022

Dark pools and high frequency trading (HFT) are contentious subjects in financial markets. Billions of dollars are traded through dark pools, and HFT algorithms with just small, incremental price differences make billions of dollars. And it all can happen in milliseconds. Most importantly, dark pools and HFT are part of the current market environment. Anyone who’s invested in the markets needs to know what they’re involved with and what they’re up against.

View Cheat Sheet
Stocks Trend Trading For Dummies Cheat Sheet

Cheat Sheet / Updated 04-26-2022

The practicality of trend trading is that you're waiting for the market to "show its hand" by establishing a clear direction and then jumping onboard for the ride. This handy Cheat Sheet provides an overview of how to follow the big-money market players to the glorious land of profitability. Get tips on why trend trading works so well, how to determine a trend that will continue after you enter the market, and how to manage your risk once you're in a trade.

View Cheat Sheet
General Investing High-Level Investing For Dummies Cheat Sheet

Cheat Sheet / Updated 04-06-2022

In high-level investing, investors and speculators track the major markets and critical global issues that affect stocks and other securities, both in the United States and other major markets. Check out the following sites, tools, and pointers to stay informed.

View Cheat Sheet
Stocks 11 Criteria for Choosing a Cannabis Investment

Article / Updated 03-31-2022

You’ll find no shortage of investing strategies and schemes online for earning a fortune trading stocks, but no magic formula exists. If such a formula did exist, the person who discovered it probably wouldn’t be so eager to share it or to try to make money selling the “foolproof” technique. You can also find plenty of investment gurus online touting the best cannabis companies or stocks to invest in or predicting what will be the next big thing in cannabis, but can you really trust them? The most profitable and safest way to invest in cannabis is no secret: Put your money in the best companies. While that certainly sounds easy enough, how do you know which cannabis companies are best? How do you really know that a company will be successful and that you’ll earn a good return on your investment? The answer is, you don’t. However, you can increase your odds by investing in profitable businesses, or businesses that have what it takes to be profitable. Following are 11 criteria for choosing a business to invest in. A business doesn’t have to meet all ten criteria to be a good investment. For example, if a business has a great management team, the fact that the business isn’t profitable yet may be less important. However, you should consider all these criteria before investing in any cannabis business. Experienced and successful management team I cannot stress enough the importance of vetting the people who are running the business. These are the folks who will make or break the business (and your investment), so you want to be sure they’re knowledgeable and experienced in both cannabis and running a business, and that they don’t have a history of failed business ventures. Here’s what to look for: Any past criminal activity that could be a warning sign that the business is not legitimate, such as past Securities and Exchange Commission (SEC) violations Cannabis knowledge and experience Business management knowledge and experience No long track record of failed business ventures A positive reputation — respected in the cannabis industry or in business circles An individual rarely has all of the qualities needed to run a successful cannabis business. For example, someone with loads of cannabis knowledge and experience may not have business or people management expertise. However, the management team, as a group, should have all of the knowledge, skills, and experience required. Steady revenue growth Revenue growth is a good indicator of a business’ success, showing whether sales are increasing or decreasing. If revenue growth is steady or negative, the business is failing to remain competitive. Check the business’ revenue from month to month and from quarter to quarter. If the company has been in business for several years, look at its annual revenue from one year to the next. You can find a company’s revenue on its income statement. To compare revenue growth between two or more businesses, convert the dollar values to percentages. Start with this year’s revenue, subtract the revenue from the same period last year, divide the result by last year’s revenue, and then multiply by 100. Note that you don’t need to know the revenue for an entire year to make this calculation. For example, suppose it’s July, so the business only has revenue from the first six months of this year. This year, the company had $10 million in revenue. For the first half of last year, the company had $8 million in revenue. Its revenue growth as a percentage is: ($10 million – $8 million)/$8 million x 100 = 25% Consistent profit growth Profit is total revenue minus total expenses. A positive result means the business has earned more than it has spent. A well-run business shows growth not only in revenue but also in net profit. Negative or declining profit growth with rising revenue growth could be a sign that a business’ operational efficiency is dropping — that revenue isn’t keeping up with increases in expenses to operate the business. A negative profit margin (revenue minus expenses) is not necessarily bad. Successful businesses often operate at a loss when they’re investing toward future growth. If profit growth is negative or declining, dig deeper to find out what the business is investing in, how it’s getting the money to continue operating, and, if it is borrowing money, whether it has the means to make the loan payments. Comparatively low price-to-earnings ratio What is the price-to-earnings (P/E) ratio? It is a stock’s share price divided by its earnings per share, which is the company’s total profits divided by the number of shares. Suppose a stock’s share price is $10, its annual profit is $1 million, and the total number of shares is 500,000. Earnings per share is $1 million divided by 500,000, which equals $2 per share. The P/E ratio is $2 divided by $10, which is a ratio of 5 to 1. By itself, the P/E ratio doesn’t tell you much, but when you compare it to the P/E ratios of other companies in the same business, it’s a good indicator of whether a stock’s price reflects the company’s value. A comparatively low P/E ratio may indicate a good value for your investment. Don’t consider the P/E ratio in a vacuum. A company that’s growing fast and investing heavily in that growth may have a high P/E ratio but be a better investment than a company that’s more profitable now but is losing market share. Positive money flow indicator One way to gauge a company’s value is to check the money flow index (MFI), which measures the momentum of a security by looking at movements of trading volume and price. If investment dollars are flowing toward one company and away from another, this trend could be a sign that the company drawing more investor interest is on its way up, while the other company is on its way down. The MFI falls into the realm of technical analysis, and it may not be the best indicator of a company’s health. A rising share price could be an indicator of a pump-and-dump scheme or simply that the company’s name was mentioned in a news article that shed a positive light on it. It’s more an indicator of investor sentiment than the health and vitality of the business. Expanding free cash flow When a company has a positive cash flow (is earning more than it’s spending), it has money to reinvest in the business, settle debts, pay expenses, build a buffer against future financial setbacks, and even share its profits with investors. Generally speaking, you want to invest in companies that demonstrate an increasingly positive cash flow. In a young industry like cannabis, in which businesses are just getting started, fewer businesses are likely to have a positive cash flow, let alone an expanding free cash flow. They’re more focused on getting started and growing. In addition, too much free cash flow could be a sign that the business isn’t spending enough money for growth or isn’t leveraging the money it has as optimally as possible. Operations in other states or countries Due to laws prohibiting the sale and transportation of marijuana across borders, cannabis businesses often struggle to survive in their own jurisdictions and face even greater challenges establishing operations in other states and countries. However, those that are successful in increasing their reach tend to be impacted less by challenges or setbacks in individual markets. In addition, they’re better positioned to expand into other markets as marijuana laws are relaxed. Growing market Markets for certain products expand and contract. For example, the market for vape products in the cannabis industry is huge, because many consumers want a similar experience to smoking it, without the smoke. However, when people started getting sick from black market vaping products, the vape market took a huge hit. It has since recovered, but this example shows how industries can be affected by new products (vapes) and news. Before investing in a company, consider how well it caters to current consumer demand and how well it adjusts to changes in consumer demand. In many ways, the cannabis industry is like the smartphone industry — to be successful, a cannabis company must be able to stay ahead of the curve on consumer demand. Increasing market share The cannabis industry is highly competitive, and demand for product isn’t unlimited. To grow, businesses must increase their share of the pie; they can’t simply make more pie (increase demand). And, the ability to grow by expanding into different markets is often restricted by legal and regulatory issues. So, when investing in cannabis, look for companies with increasing market share. You may be able to find out a cannabis company’s market share by researching on cannabis business news sites. Or, you can search these same sites to find out the total revenue for the industry in the country or state in which the company operates and then divide the company’s revenue by the industry’s revenue for that same period. Positive reputation in the industry As you immerse yourself in the cannabis industry and read cannabis newsletters and other publications, you’ll begin to notice the names of companies and people appearing again and again. Pay close attention to which companies and people seem to be leading the industry. Which people are renowned authorities in the industry? Which companies and people seem to be the most highly respected? Then, research these companies and individuals to find out what they’re doing and what they’re saying about other businesses and individuals in the industry. As you begin to identify the movers and shakers in the industry, you’ll develop a better sense of where to invest your money. Who’s partnering with whom? Where are cannabis companies going to buy the products and services they need? You can often tell a lot about a company by looking at its business associates. Manageable debt Plenty of companies, including cannabis companies, struggle with solvency. Excessive debt is a key issue in today’s economy. When domestic energy became a hot industry a few years ago, many of those companies ultimately went bankrupt due to unsustainable debt. Imagine if you didn’t have enough income to cover your mortgage, utility bills, and credit card payments — the same thing can happen to businesses. Managing debt is a critical success factor especially for cannabis (or any) companies that are not yet profitable. You also want to look at the debt holder. Some companies, particularly those that seek aged debt, are toxic lenders. Avoid any company that has debt holders with convertible notes or aged debt — it’s a killer.

View Article
Stocks The Impact of Laws on the Cannabis Industry

Article / Updated 03-31-2022

When discussions arise about the legality of cannabis, they usually revolve around growing it, selling it, or possessing it. However, cannabis laws and the enforcement of those laws also impact the industry, influencing everything from where different cannabis businesses can operate and under what conditions, to the taxes and fees they pay and, ultimately, the cost and availability of the product. Complications and confusion often arise over differences in laws and regulations at the federal, state, and local levels. For example, in the U.S., cannabis is illegal at the federal level, legal for medical use in many states, legal for both medical and adult use in several states, and prohibited for sale and possession in many municipalities within states where it’s legal. In 2013, Uruguay became the first country to officially legalize cannabis for both medical and adult use. In 2018, Canada became the second country and the first G7 member to legalize cannabis. In the provinces of Quebec and Alberta, the legal age is 18; in the remainder of the country, it’s 19. In New Jersey, before voters even had a chance to vote on a proposition to legalize adult-use marijuana, more than 50 local governments already had passed laws banning its sale or possession. This article brings you up to speed on federal, state, local, and international marijuana laws in the hopes that by knowing the laws, you’ll be better prepared to ride the waves that are sure to rock the cannabis industry as its future unfolds. U.S. cannabis federal law and enforcement In the U.S., in the 1800s, marijuana was used as an ingredient in many medicinal products sold in pharmacies across the country, but by 1931, 29 states had outlawed it, citing research at the time that linked the use of marijuana with violence, criminal activity, and other deviant social behaviors. Federal regulation didn’t occur until President Franklin D. Roosevelt signed the Marihuana Tax Act of 1937, which required every person who sold, acquired, dispensed, or possessed marijuana to register with the Internal Revenue Service (IRS), pay taxes on their transactions, and complete an order form that required the name and address of both buyer and seller and the amount of marijuana being sold or bought. Although the act did not specifically criminalize marijuana, it came to be used in that way. In 1970, the Supreme Court overturned the law, and Congress repealed it but simultaneously passed the Controlled Substances Act, designating marijuana a Schedule 1 controlled substance based on the belief that it had a high potential for abuse, no currently accepted medical use, and a lack of accepted safety regarding the use of the drug. Adding marijuana to the list of Schedule 1 controlled substances (along with heroin, LSD, ecstasy, and magic mushrooms) effectively made it illegal for anything other than very limited research. In particular, the following activities are federal crimes: Transporting cannabis across any state line, even if it’s transported from one state in which it’s legal directly to another. Flying with cannabis, because it enters into federal airspace. Possessing or using marijuana on federal land, including national parks and forests. Federal laws and their enforcement impact cannabis businesses and investors in the following ways: Because transporting cannabis across state lines is illegal, cannabis businesses that want to expand sales into other states must duplicate their operations in those states. They can’t take advantage of economies of scale simply by shipping their products across state lines. The Bank Secrecy Act (BSA) and federal money-laundering statutes discourage banks from offering services to cannabis businesses. (Passed in 1970, the BSA is a U.S. law that requires financial institutions in the U.S. to assist federal agencies in detecting and preventing money laundering.) Violations can result in steep fines and imprisonment of bank officials. Inaccessibility to basic banking services increases the costs and complexities of operating cannabis businesses. Some banks are starting to serve cannabis businesses, and the Financial Crimes Enforcement Network, the financial intelligence unit of the U.S. Department of Treasury, offers guidance to banks on how to comply with regulations when serving marijuana and ancillary businesses. However, compliance places an added burden on banks to police the marijuana businesses they serve. In addition, the Department of Justice reserves the right to prosecute banks for working with these businesses, which face these obstacles: Without basic banking services, cannabis businesses have no access to the capital markets, which are useful for raising money for development and growth. They need to rely on private investors, which provides private investment opportunities but at a very high risk. According to the principles of contract law, any contract in breach of public policy is void and unenforceable, which is a major concern for investors or funds regarding any investment contract’s legitimacy. This concern serves as another obstacle to cannabis businesses seeking to raise investment capital for development or expansion. Cannabis businesses are required to pay income taxes, but filing tax returns (federal and state) constitutes self-incrimination. In addition, without banking services, cannabis businesses must pay their taxes in cash, which is inconvenient, costly, and risky. Due to the 280E provision in the IRS tax code, cannabis businesses are prohibited from deducting ordinary business expenses from their gross income, thereby significantly increasing their tax burden and negatively impacting their profitability. Bankruptcy protections are unavailable for cannabis businesses in the U.S. Without the option to restructure, cannabis businesses are often forced to shut down when they encounter credit issues. As a result, creditors may have difficulty collecting their debts, which discourages them from loaning money to cannabis businesses in the first place. Fear among potential customers of losing a federal job, student financial aid, the right to own a firearm, or eligibility for federally subsidized housing can put downward pressure on cannabis sales. If marijuana is legalized at the federal level, the entire business environment will change, allowing large, well-established companies in other industries, such as alcohol, tobacco, and pharmaceuticals, to compete for market share. So, what does this mean for investors? Regulations generally move in a direction that favors growth and investment opportunity. At this time, more than two-thirds of Americans live in a jurisdiction that has some form of legal cannabis. The country is trending toward a repeal of prohibition, but that will likely be a slow and clumsy process from a regulatory standpoint. If you’re looking to invest in licenses and permits, consider states with a more limited number of granted permits. States that limit the number of permits make those permits more valuable by doing so. You also want to consider states that have constitutions providing for voter referendums. As you do, you’ll notice that most states that allow for referendums are west of the Mississippi and business friendly. There’s a historical reason for that. Those states joined the union in the 19th century, and their state constitutions are based on the Spanish and French democratic models that allow voters to pass laws by referendum. As a result, and generally speaking, states with voter referendum and business-friendly regulatory environments tend to have legislation providing for some degree of legalized cannabis. Be careful when you’re considering investing in any company whose licenses are based on narrow zoning laws. I’ve invested in real estate that was once coveted because it was zoned for cannabis only to have the city loosen its zoning restrictions six months later. I paid a premium for the property, only to see its value drop when zoning laws made more real estate available for cannabis businesses. I could have avoided that mistake by researching more thoroughly what was on the ballot or what was being discussed by the zoning committee. Keep an eye on the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act, which would amend the Controlled Substances Act (CSA) so that any state-legal cannabis activity would no longer be considered illegal under federal law. The STATES Act would also solve the cannabis banking problem, because the federal money-laundering statute is triggered only for illegal activities. Likewise, because the 280E provision applies only to revenue generated by illegal means, cannabis businesses would be able to deduct their business expenses just like any legal business. Although the STATES Act has bipartisan support and was passed by a large margin in the House of Representatives, as of this writing, the bill was hung up in the Senate. The Cole Memorandum During the Obama administration, on August 29, 2013, U.S. Deputy Attorney General James M. Cole issued a trio of memos, including the Cole Memorandum, to all U.S. attorneys general. The memo informed them that due to limited resources, the U.S. Department of Justice would not be enforcing federal marijuana prohibition in states that legalized and effectively regulated and enforced their own marijuana laws. The memo directed the state attorneys general to “not focus federal resources in your states on individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana.” Instead, states were encouraged to address federal priorities, for example, “by implementing effective measures to prevent diversion of marijuana outside the regulated system and to other states, prohibiting access to marijuana by minors, and replacing an illicit marijuana trade that funds criminal enterprises with a tightly regulated market in which revenues are tracked and accounted for.” This memo was rescinded under the Trump administration in January 2018 by Attorney General Jeff Sessions. The impact of the rescission in individual states has yet to be determined, but it’s a cause for concern because it indicates that the feds may be leaning toward greater enforcement of the federal prohibition of marijuana. State cannabis laws Although cannabis is federally illegal, each state has the right to legalize it within its borders and set the rules and regulations for personal and commercial growth, production, transportation, sale, possession, and use. States fall into one of the following five categories: Fully legal: Both medicinal and adult use are allowed. Fully illegal: No medicinal or adult use is allowed or decriminalized (see the final item in this list for more about decriminalization). Medical and decriminalized: Medical use is legal, and possession and use is decriminalized. Medical only: Marijuana is legalized only for medical use, which in some states allows only cannabidiol (CBD) oil use (CBD doesn’t contain the psychoactive ingredient THC). Decriminalized: Possessing or using small amounts of marijuana will not lead to arrest, prosecution, prison time, or a criminal record (decriminalization details vary by state). The easiest way to find out where each state in the U.S. stands on legalization is to search the web for “marijuana legal states.” You’ll see a color-coded map like the one shown. State marijuana laws change frequently, so access a map from a reliable source that has current information. State laws and enforcement of those laws can negatively impact cannabis businesses and investors in several ways, including the following: Every state in which marijuana is legal has numerous rules and regulations that apply to marijuana growers, producers, sellers, and distributors. These rules and regulations govern everything from verifying the identities of buyers to packing, labeling, and tracking products, and all of them add to the cost and complexity of doing business. Marijuana taxes vary by state, with adult-use marijuana typically taxed at a much higher rate than medical marijuana. Higher taxes add to the product cost and can drive sales to illegal sellers, negatively impacting sales for legal businesses. States vary in the number of legal cannabis businesses they allow, how much they charge for licenses, and how quickly they implement legalization, which can all impact how successful cannabis businesses are in each state. Some states require marijuana businesses to reserve large amounts of cash before applying for a license. This practice encourages rolling up marijuana businesses—a method that involves acquiring and merging small businesses to increase their collective value. In these states, large marijuana businesses have a distinct advantage over smaller operations. State laws may stipulate residency requirements for investors in cannabis businesses. Some states in which marijuana is legal are less stringent in enforcing laws against illegal sales, which can negatively impact sales for legal businesses. Local laws In states where cannabis is legal, local municipalities can separately regulate its growth, production, and sale within their borders. They are also allowed to add taxes and fees to commercial efforts above and beyond those of the state. In some cases, municipalities can completely ban commercial endeavors. For example, Colorado Springs permits medical sales but has continued to ban adult-use dispensaries. Penalties can vary significantly from one municipality to another. These variations and costs can negatively impact the sales and profits of cannabis businesses, even in states in which cannabis is legal. Cannabis laws in other countries As an investor, you want to know about a cannabis company’s range of operations—specifically, the countries it serves around the world. A company that operates in several countries may be less susceptible to changes in laws and regulations than a company operating in only one country. In addition, a company’s global reach reflects its ambitions for growth. Here’s a list of countries in which cannabis is legal or decriminalized to some degree: Australia Canada Germany Italy Mexico The Netherlands New Zealand South Korea Spain Switzerland Uruguay S. Virgin Islands Carefully research each market before investing in companies that operate in it. Examine the laws and enforcement of those laws, cannabis demand, the costs of doing business, competition from illegal sellers, and other factors to gain a better understanding of the potential for sales, profits, and growth, as well as the risks involved.

View Article
Stocks 10 Reasons Not to Invest in Marijuana Stocks

Article / Updated 03-31-2022

You’re going to invest in cannabis. Remember that investing in cannabis is risky business. Many people who invested years ago got the jitters, sold their shares, and lost a lot of money. Some people lost money to con artists or well-intentioned friends or family members. Others lost out because they invested in cannabis businesses that didn’t make it. However, as long as you’re well aware of the risks, if you decide to move forward, I applaud your bold initiative, and I hope you receive ample compensation for your risk-taking. People like you are the ones who drive innovation and fuel the success of new industries such as cannabis. Still, I’m going to take this opportunity to caution you in the hopes that the risks persuade you to tread carefully — to do your homework and perform your due diligence. Savvy investors stand to earn handsome returns on their investments as long as they make smart investments. Those who rush in and are clueless and careless will lose their shirts. Following are 10 reasons for not investing in cannabis. Keep these reasons in mind as you seek your fortune in the green rush. Marijuana is still federally illegal in the United States Although momentum seems in favor of federal legalization of marijuana sometime in the future, nobody has a crystal ball that can tell them for sure what will happen. A new study might come out revealing some currently unknown harmful effect that makes legislators who are already against legalization dig in their heels. Or, some other unforeseen event or change in culture or beliefs could cause voters to become less accepting of marijuana use. Who knows? Until marijuana is federally legal, the federal laws against it will restrict growth in the industry in several ways, including the following: Increase the cost of doing business Continue to fuel the black market for cannabis Complicate and increase the cost of expanding businesses across state lines and into foreign markets Make banking and other financial services less available for cannabis businesses When you invest in cannabis, to a certain degree, you’re betting that it will ultimately become legal on a federal level. I believe that will happen, eventually, but it’s not a sure thing, and even if it were, nobody knows when it will happen. Marijuana investment scams are rampant Con artists profit on the human desire to have a better life. Some would call that greed, but I really think most people just want to have enough money to pursue their dreams. Many people see cannabis as the next gold rush. In fact, the recent boom in legal cannabis companies has been described as a “green rush.” Everyone wants to get in on the action and not to miss out on the opportunity to profit from this exciting new industry. And that’s exactly what makes people vulnerable to scams — that and the fact that people generally trust others. Con artists know that people are eager to invest in cannabis, so whenever someone expresses this eagerness, they become a target. Of course, the threat of a scam isn’t reason enough to avoid investing in cannabis, but it is a good reason to remain skeptical of opportunities that seem too good to be true. Earning a profit as a cannabis business is a huge challenge As an investor, you’re wise to invest in profitable businesses or at least those that have a good chance of being highly profitable. Unfortunately, cannabis is a heavily taxed and regulated industry, which increases the costs and complexities of doing business. It’s not like selling bottled water. Here are a few line items that take a huge bite out of cannabis business profits: Taxes. Cannabis businesses are prohibited from claiming business deductions on their federal taxes. Also, the high sales and excise taxes on cannabis products reduce demand and steer sales to the black market. Application and licensing fees. Application and licensing fees for legitimate cannabis businesses can be exorbitant in some states; for example, Connecticut charges a $25,000 application fee and a cultivation licensing fee of $75,000. In addition, businesses often must hire a lawyer to navigate the process. Capital requirements. Many states require cannabis businesses to hold a certain minimum in liquid assets (typically hundreds of thousands of dollars) to obtain and keep their license. Compliance costs. Companies often incur high legal costs and must purchase specialized software to remain compliant because most states require tracking cannabis “from seed to sale.” I could go on, but the point is that earning a profit in cannabis isn’t easy, and until it becomes easier, cannabis businesses will have a tough time proving their value to investors. Illegal operations undermine demand for legal products In many areas where cannabis is legal, the black market continues to thrive because 1) cannabis is often cheaper on the black market where businesses don’t pay taxes or application and licensing fees and don’t incur the costs of attorneys and compliance, and 2) the cannabis community is sort of anti-establishment, so many consumers prefer to buy from unlicensed growers and dealers. In addition, in many states in which cannabis is legal, people are allowed to grow a certain number of cannabis plants of their own. They need to buy seeds, fertilizer, and maybe the equipment to set up a grow room, which gives suppliers of those items additional business, but it decreases demand from commercial growers, manufacturers, and dispensaries. The industry is very fragmented The cannabis industry consists mostly of small businesses competing against one another, which means businesses will come and go. Some will fail, and some will succeed. Eventually, as cannabis legalization grows, large national companies will step in and either buy up competing companies or drive them out of business. People who invest in cannabis now, when the industry is fragmented, are likely to experience losses as some of the companies they “bet on” fall to the competition. The take-home message here is that if you’re accustomed to trading in companies listed on the major stock exchanges, such as the NYSE and Nasdaq, now may not be the best time to invest in cannabis. You may want to wait until the industry starts to consolidate; then, you’ll have an easier time predicting winners and losers. Oversupply is more likely than not Many states in which cannabis is legal face problems with oversupply — too many growers growing more cannabis than the consumers in the state want or need. Oversupply drives down prices and profits and makes companies less attractive to investors. Oversupply is another problem that’s at least partially due to the fact that cannabis is illegal on a federal level. If cannabis were legal federally, or if growers could at least ship their products over state lines, they’d have a larger market in which to sell and compete. As it is now, states must deal with the problem of oversupply internally, which usually means issuing fewer licenses to cultivators or charging significantly more for applications and licenses. Bad news is just around the corner To a large degree, rumors and news drive the stock market. In fact, some investment gurus advise to “buy on the rumor and sell on the news.” With cannabis, the opportunity for bad news is pretty high. In 2018, good news (mostly a combination of hype and hope) drove share prices in cannabis companies sky high. Shortly thereafter, the bad news (mostly poor earnings reports from some of the major players) led to a massive selloff. This boom-to-bust cycle is likely to continue because hype and hope continue to motivate investors in this industry. In addition, because cannabis is a drug, both good news about its benefits and bad news about its side effects are likely to contribute to the volatility. There is money to be made by investing in cannabis, but I urge you to invest with your head and not your heart. Carefully research each company’s fundamentals and be sure the share price is supported by those fundamentals. Marijuana laws are slow to change As long as marijuana remains illegal at the federal level, many states are going to drag their feet over legalization, and local jurisdictions are going to use the federal law as an excuse to pass their own restrictions on its sale and use. When the federal prohibition of marijuana will end is anybody’s guess. I think it’s likely to happen the next time the Democrats control the White House and Congress, which might happen before this book is published, four years later, or maybe even a much longer time from now. Company shares are being diluted Companies can secure financing through debt (borrowing) or equity (selling shares in the company), which is true of all companies. What’s different about cannabis companies is that they have trouble securing loans from banks, so they have to rely more on equity. When they get in a financial pinch, if they can’t get a loan, they need to sell more shares, and the more shares they sell, the more diluted the price of existing shares becomes. Unfortunately, investors have little control over decisions to issue more shares, even though that decision impacts the value of their investment. Shares can be diluted in any sector, any industry, and any company, but the possibility is higher among cannabis companies. Demand is unpredictable Several states that have legalized marijuana are finding that demand can be unpredictable for a variety of reasons, including the following: Cross-border sales may increase demand for marijuana in legal states surrounded by illegal states. However, when bordering states legalize it, cross-border sales decline. Any black-market sales reduce demand for legal cannabis. Any bad news about negative side effects reduces demand, although the drop in demand is usually short-lived. Whether demand for cannabis will increase or decrease with its legalization is hotly debated. I think demand is almost certain to rise with legalization, but others think it could fall as marijuana loses its appeal as a “forbidden fruit.”

View Article
page 1
page 2
page 3
page 4
page 5
page 6
page 7
page 8
page 9
page 10
page 11
page 12
page 13
page 14
page 15
page 16
page 17
page 18
page 19
page 20
page 21
page 22
page 23
page 24
page 25
page 26
page 27
page 28
page 29
page 30
page 31
page 32
page 33
page 34
page 35
page 36
page 37
page 38
page 39
page 40
page 41
page 42
page 43
page 44
page 45
page 46
page 47
page 48
page 49
page 50
page 51
page 52
page 53
page 54
page 55
page 56
page 57
page 58
page 59
page 60
page 61
page 62
page 63
page 64
page 65
page 66
page 67
page 68
page 69
page 70
page 71
page 72
page 73
page 74
page 75
page 76
page 77
page 78
page 79
page 80
page 81
page 82
page 83
page 84
page 85
page 86
page 87
page 88
page 89
page 90
page 91
page 92
page 93
page 94
page 95
page 96
page 97
page 98
page 99
page 100
page 101
page 102
page 103
page 104
page 105
page 106
page 107
page 108
page 109
page 110
page 111
page 112
page 113
page 114
page 115
page 116
page 117
page 118
page 119
page 120
page 121
page 122
page 123
page 124
page 125
page 126
page 127
page 128
page 129
page 130
page 131
page 132
page 133
page 134
page 135
page 136
page 137
page 138
page 139
page 140
page 141
page 142
page 143
page 144
page 145
page 146
page 147
page 148
page 149
page 150
page 151
page 152
page 153
page 154
page 155

Quick Links

  • About For Dummies
  • Contact Us
  • Activate A Book Pin

Connect

Opt in to our newsletter!

By entering your email address and clicking the “Submit” button, you agree to the Terms of Use and Privacy Policy & to receive electronic communications from Dummies.com, which may include marketing promotions, news and updates.

About Dummies

Dummies has always stood for taking on complex concepts and making them easy to understand. Dummies helps everyone be more knowledgeable and confident in applying what they know. Whether it's to pass that big test, qualify for that big promotion or even master that cooking technique; people who rely on dummies, rely on it to learn the critical skills and relevant information necessary for success.

Terms of Use
Privacy Policy
Cookies Settings
Do Not Sell My Personal Info - CA Only