Make the right choice and a pot stock can make you rich. Choose badly and you can lose your shirt.

But don’t fret. As chief investment strategist of Investing Daily’s premium trading service Marijuana Profit Alert, I’ve learned many valuable lessons about this rapidly evolving sector.

Today, I’ll share six essential tips that can help you invest in cannabis stocks as profitably as possible.

1. Focus On The Largest Companies In The Sector

The cannabis sector is loaded with micro- and nano-caps. These are companies with market capitalizations of less than $250 million and $50 million, respectively. These young companies offer tremendous growth potential. But they’re also prone to bouts of extreme volatility.

That volatility can be driven by unexpected fluctuations in sales and earnings growth. It’s also just a lot easier for big traders with billions to push around a $50 million stock. Focusing on the biggest companies in the cannabis sector helps moderate both factors.

2. Go International

Some of the best opportunities in cannabis are happening outside the United States. Case in point: German officials this year are moving forward with national cannabis legalization. Berlin’s decision will have major repercussions for the cannabis industry in the rest of Europe and globally.

Germany already is leading the European cannabis market in terms of size and growth. Italy is poised to legalize cannabis this year as well.

Another hotbed of marijuana legalization is Latin America. Mexico recently became the latest country to fully legalize possession and use for adults, a move that will serve to spur similar developments in other countries in Latin America. Mexico is now positioning itself as a low-cost alternative to marijuana that’s grown in the U.S. and Canada.

3. Diversify

Investors often punish themselves as much as the market does. Despite the compelling case to diversify, many investors hold portfolios with assets concentrated in relatively few holdings.

It’s often difficult to separate winners from losers in the often turbulent cannabis industry. Some of these companies will grow into global leaders while others will fail and file for bankruptcy. That’s why I recommend diversification. Owning a basket of marijuana stocks means that if one goes bust, your portfolio will survive.

4. Core Versus Peripheral Holdings

Within a diversified portfolio, it’s a good idea to weight your holdings differently. Larger cannabis stocks should have a higher allocation while smaller, more speculative cannabis stocks should have a smaller allocation.

Well-capitalized marijuana stocks should constitute your “core” marijuana holdings. As the term conveys, a “core” holding occupies the central part of your portfolio. The core requires investments that will be reliable year in and year out.

5. Focus On The Long Run

The cannabis sector is prone to extreme bouts of volatility. For example, marijuana stocks languished throughout 2023, but this year they’re bouncing back. Don’t worry about volatility too much and let it distract you from the big picture. The real opportunities in cannabis will unfold over the long run.

6. Use Stop Losses

Spreads in cannabis stocks can be much wider than blue chips because of their smaller market caps and lower daily trading volumes. When buying or selling cannabis stocks that are smaller and riskier, I recommend using stop losses.

One of the most widely used devices for limiting the amount of loss from a dropping stock is to place a stop-loss order with your broker. Using this order, the trader will pre-set the value based on the maximum loss the investor is willing to tolerate.

If the price drops below this fixed value, the stop loss automatically becomes a market order and gets triggered. As soon as the price falls below the stop level, the position is closed at the current market price, which prevents any additional losses.

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John Persinos is the editorial director of Investing Daily.

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This article previously appeared on Investing Daily.