These Are the 5 Most Popular Marijuana Stocks

Cannabis investing has taken the world by storm, and investors are trying to find out the best way to play the marijuana market. With so many stocks to choose from, it can be difficult to decide exactly what the smartest pick is -- or where there could be traps for the unwary.

One important consideration about up-and-coming stocks in any fast-growing new industry is just how liquid a market there is for shares. For U.S. investors, that's especially important in the cannabis arena, because many of the biggest players in the industry are Canadian companies. Many of them don't even have shares that trade on major U.S. stock exchanges, and that can create hidden dangers that can eat into your profits or even cause you to lose money on your trades. By focusing on popular marijuana stocks with higher trading volume, you're less likely to run into some of the challenges that thinly traded stocks cause.

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Here are the favorite stocks for marijuana investors

When you take the average daily trading volumes of stocks in the cannabis industry and multiply them by their respective share prices, you can see where most of the action is in the marijuana market. Below are the five top stocks by that metric.

Data source: Yahoo! Finance.

It's not shocking to find these companies at the top of the list. Even the order of how these stocks appear makes sense in many ways:

• Canopy Growth was the first marijuana stock to gain the attention of a major player outside the industry, with Constellation Brands stepping in to make multiple investments in the Canadian cannabis company.
• Cronos Group sealed its own major deal with tobacco giant Altria Group, and that dramatically increased the amount of visibility and attention that its marijuana operations received.
• Tilray's initial public offering last summer got a huge amount of attention, and its shares have been even more volatile than those of most of its peers. With a price that's been as high as $300, IPO investors have seen big highs and lows from trading in Tilray stock.
• Aurora and Aphria only became available to U.S. investors more recently, but they both have built up areas of strength in the cannabis space. Aurora has made multiple acquisitions to bulk up its production capacity in an attempt to outgrow the competition, while Aphria has recovered from a particularly painful performance in 2018 in its efforts toward gaining greater acceptance in the industry.

Why trading volume is not enough

The big benefit of choosing marijuana stocks that have a lot of trading volume is that you can avoid the problems that plague thinly traded stocks. With these stocks, spreads between bid and ask prices tend to be relatively narrow, so you don't run into big transaction costs every time you buy or sell shares.

In addition, even if you have a relatively large amount of money to invest, you don't have to worry that your order will cause a substantial movement in the stock's price. Even if an important piece of news affects the stock in question, trading activity will likely remain orderly -- and that's something you can't take for granted with smaller companies.

However, investors need to understand that just because there's a lot of interest in a given stock doesn't make it a sure thing. All you have to do to see evidence of this is to look back at the declines that marijuana stocks suffered at key times last year. These stocks have routinely traded as much as 40% to 70% below their respective highs. Volatility is a fact of life in the cannabis industry, and even sticking to the most popular stocks can't insulate you entirely from it.

Be smart with marijuana stocks

These five companies are a good place to start with your marijuana investing research. But it's far too early to pick certain winners and losers in the space. As comfortable as it can be to invest knowing that there's a crowd of your peers there with you, popularity won't keep these pot stocks from plummeting if their fundamental business prospects turn lower.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.