If you’ve ever felt lost in all of the terminology we use here at the Institute, this edition of the member Q&A is for you.
If you’ve only just recently joined us here at the National Institute for Cannabis Investors – or if you’ve been with us for a while but are new to investing in general – a lot of the industry terms we use might be a little confusing.
At the Institute, our aim is to arm all of our members with the tools they need to become successful investors.
With that in mind, today’s member Q&A will focus on explaining some of our jargon so that you can apply your new knowledge to help determine the best potential moneymaking opportunities in cannabis today.
So let’s get started with a term you’ve probably been seeing a lot recently to refer to many cannabis companies.
Angelika J. asks: “Greg, what is a vertically integrated company? What does vertically integrated mean?”
Great question, Angelika, and not just for cannabis companies. A “vertically integrated” company is one that has a presence in more than one part of the chain between a raw material and a finished product which is sold to a consumer. How much of the process a company must own to call itself vertically integrated is an open question – there’s no regulatory body that declares whether a company is vertically integrated.
But here’s an example that might help: Suppose you’re looking at a steel company. If that company owns its own iron ore mine, makes the steel, and rolls or shapes that steel for use in autos or construction or whatever, then it’s a vertically integrated company. Most people would call it that even though it doesn’t make the cars or the buildings at the very end of the value chain. But if all it does is produce big slabs of steel using iron ore it purchased from others and it sells those slabs to other companies who roll or shape them, then it is not vertically integrated.
So in the cannabis industry, a company is generally considered vertically integrated if it grows its own cannabis, processes it into products, and then sells the products through stores it owns. If the company owns all of these steps, it is said to be a “seed to sale” vertically integrated company. It starts with a cannabis seed and ends up with a customer buying a finished product off of that same company’s shelves. A company can still be vertically integrated if it only owns some of those steps. Say it buys raw cannabis but still makes the products and operates the stores. Or it could grow its own cannabis and make products, but sell those products to stores owned by others. The point is, to be vertically integrated, a company must control more than just one step in the process.
The benefit of being vertically integrated is that there’s usually profit at each step in the process. Vertical integration also gives a company some control over costs – a sudden spike in the price of iron ore would hurt our one-step steel company a lot more than it would our vertically integrated company! In the cannabis business, it’s particularly important to be vertically integrated because it gives you that control over supply.
Now let’s take a look at a question Joan had about a great investing opportunity we shared with you not too long ago.
Joan T. wonders: “How do we know which STZ to buy? STZ.P, STZ.N, STZ.Z, STZb.N, STZ.A. I’m very confused when you only say STZ but there are all these to choose from. Thank you.”
Hi, Joan. This is a great question because it can be very confusing to the new investor, and we all want to avoid costly trading mistakes. The brokerage firms and internet searching can cause confusion, and in the case of Constellation Brands (NYSE: STZ), the company complicates things further.
Constellation Brands has two kinds of common stock, Class A and Class B. The Class B stock gets more votes per share, and the Class A stock gets a higher dividend. This is unusual, but it keeps the company in the control of the Sands family while sending an outsized portion of the profits to non-Sands shareholders. That’s a pro-shareholder move I support.
Both classes of common stock are listed, even though only the Class A stock trades regularly. So that STZb.N symbol you saw is for the Class B stock – the stock you don’t want. The other symbols are those used by various online and physical brokers to denote the stock in their systems. STZ.A is someone’s abbreviation for those class A shares that you do want, but so is STZ.N, which simply means that the stock trades on the New York Stock Exchange.
The good news is that you need not get bogged down in all those symbols – we provide the exact symbol you need when you place a trade. All you have to do is make sure you’re buying it in the right country, since some Canadian companies share symbols with companies on American exchanges. Even better, when you go to your brokerage’s site, you can just start typing in the company’s name and a set of symbols will appear on a list. Pick the symbol we gave you – or which you saw in the NICILytics database – and you’ll be fine.
This next question asks about some of the abbreviations we frequently use here at the Institute.
Gilbert R. wants to know: “What do OTC, CSE, and SEC refer to? Do you have definitions or a place where I can find a glossary for this?”
Thanks for the comment, Gilbert. I think your question will over time be very helpful to your fellow members, as you’ll see.
The OTC is the “over the counter” market for stocks in the United States. An over-the-counter stock is one that does not trade on an exchange – it trades directly between brokers. Most of the time this means that the stocks are less liquid than exchange-listed stocks. That is, they’re harder to trade, and both buyers and sellers get a worse deal than they would with an exchange-listed stock. But for cannabis stocks which also have an exchange listing in Canada, there are brokers which ensure good liquidity by acting as market makers in the U.S. stocks and using the Canadian exchanges as a guide. Those stocks are usually pretty easy to buy and sell, at least in reasonable quantities.
The CSE is one of those Canadian exchanges I just mentioned. It’s the Canadian Securities Exchange, and it is incredibly important in the cannabis industry because it provides a good, liquid exchange where U.S. cannabis companies can list. The larger exchanges like the TSX (Toronto Stock Exchange), the NYSE (New York Stock Exchange) and the Nasdaq (the other major U.S. Exchange) won’t allow U.S. cannabis companies to list because they’re technically violating federal law – for now.
The SEC is the Securities and Exchange Commission, the principal regulator of U.S. stocks. Its Canadian counterpart is known as the CSA, or Canadian Securities Administrators.
You can find most of this information at one place or another on the Institute’s FAQ page. But your question, Joan’s, and some others have been a good reminder that we have a lot of new investors joining the Institute. I’m really excited to be helping people take their first step into investing, and I’m gratified by their trust.
I’ve also realized that the Institute needs to do more for new investors. We’ve been hiring additional staff, and I’ve got a project or two in mind for them which will be helpful to newer investors. Look for some of that this summer. Thanks again for your question.
And if any of you have a question you’d like answered, be sure to leave a comment! We love hearing from our members, and we want to take advantage of every opportunity we have to help you become successful cannabis investors.
Executive Director, National Institute for Cannabis Investors
P.S. Yesterday, we released the May issue of the Cannabis Investor’s Report. This month is all about branding, including what it takes to be a top-tier brand, how to identify key cannabis customers, and more. Click here to learn how to access this and future editions of these invaluable report.
7 responses to “Q&A: What Do All These Terms Mean?”
May 04 2019