The volume of cannabis stocks listed on the Nasdaq have spiked ahead of the election with some stocks rising as much as 12% on Monday as voters decide tomorrow whether five states will allow recreational use of marijuana while four other states could approve medical use.

Interest in cannabis-related stocks has risen from micro cap to Nasdaq-listed equities, said Jason Spatafora, co-founder of Marijuanastocks.com and a Miami-based trader and investor known as @WolfofWeedST on Twitter. The market is predicting that voters in California and Nevada will approve legislation for recreational use and anticipates that Florida will legalize medical use.

"Should more states adopt laws to legalize either recreational or medicine use of marijuana, we can see a continued run going into the new year," he said.

Some of the stocks have been undervalued as investors were skittish and the use of drugs produced by major cannabis-focused biopharmaceutical companies have not been widely adopted. The current options for mainstream investors in this budding sector are limited to a handful of companies listed on the Nasdaq, including GW Pharmaceuticals (GWPH) , a U.K.-based biotech company with a cannabis-based epilepsy drug; Insys Therapeutics (INSY) , a Phoenix company known for its cancer pain management drug but is developing a cannabis-based drug for the treatment of epilepsy; Cara Therapeutics (CARA) , a Shelton, Conn.-based clinical state biopharmaceutical company that develops and commercializes pain relief drugs; and Zynerba Pharmaceuticals (ZYNE) , a Devon, Pa.-based company focused on developing and commercializing synthetic cannabinoid therapeutics.

This run in stock prices is also boosted by the massive gains that Canadian licensed producers are showing investors, Spatafora said. Canada is also expecting several IPOs such as Emblem Cannabis (TSX: EMC) which is expected to which will go public end of November.

"The Canadian run can prop up the U.S. market well into the spring when their national cannabis law takes effect," he said. "So long as investors are taking profit along the way rather than let greed dominate their accounts, the bubble will not burst."

Economic Impact of State Approval

An approval in Florida means the state's economy would benefit, because "cannabis has a drastic impact on real estate since entrepreneurs need legal means other than cash vaults to store their earnings due to banking restrictions," Spatafora said. "This could inevitably be a residual benefit of cannabis passage that most people are missing."

Recreational passage in California will have a smaller effect on them market since it is already a medical state which currently consists of about 75% of the total U.S. cannabis market, he said. The other states seeking approval are Arizona, Nevada, Massachusetts and Maine.

"Passage in California will only expand those numbers, but the more interesting state is Florida," Spatafora said.

Colorado's passage of both recreational and medical use in 2014 proved to be a groundbreaking test case for entrepreneurs and legislators and has generated hundreds of millions of revenue in taxes.

"The state was a crash test dummy of the industry and for all the doomsayers who said crime would increase as well as drug abuse," he said. "Colorado was a wild success with opioid addiction and overdoses dropping. Two or three states after legalization have shown states that the paradigm shift for legal cannabis has already reached a tipping point and their economies need it."

The economic impact for these states is immense - California is estimated to increase to $10 billion market by 2020, while Florida's medical market should be a $1 billion industry by 2020, said Michael Berger, a former Raymond James energy analyst and founder of Technical420, a Miami-based company that conducts research on cannabis stocks. California's recreational market is not likely to start until 2018 since Colorado voters passed the usage in 2012 and the program did not start until January 1, 2014.

"I expect the cannabis industry to be a $75 billion dollar industry by 2020," he said. "Although many people's estimates are below this, I take into account more than just the sale legal cannabis because the ancillary business will benefit significantly."

The medical marijuana initiatives are being voted on Arkansas, Florida and North Dakota while Montana is voting on an initiative to "fix the medical marijuana program after it was gutted by the legislature several years ago," said Morgan Fox, communications manager for the Marijuana Policy Project, a Washington, D.C.-based marijuana policy reform organization.

In California alone, the state and local revenues are expected to generate over $1 billion annually, according to an analysis from the nonpartisan Legislative Analyst's Office, said the Marijuana Policy Project of California. State and local governments could save $100 million annually from lower costs been allocated for enforcing marijuana-related offenses such as legal and incarceration costs.

Future State Legislation

Ballot initiatives are not likely to occur in 2017, since it is an off-cycle election year, but movement could occur in Rhode Island, Vermont and New Jersey at the statehouse level next year, said Robert Hunt, president of Teewinot Life Sciences, a Tampa, Fla.-based cannabinoid biosynthesis company, and a partner at Tuatara Capital, a New York-based private equity fund dedicated to the legal cannabis industry.

State legislatures who chose to expand a program do not need voter approval and it is likely more legislators will choose this strategy in 2017 and 2018, said Brett Roper, COO of Medicine Man Technologies (OTCQB: MDCL), a Denver-based cannabis consulting services company.

"I predict that in 2017 and 2018 instead of straight ballot initiatives, we will see the first states pass adult use legalization through legislatures," he said. "Vermont and Rhode Island have long been a favorite picks of observers for being the first to legalize through a legislative process and there has been some movement in New Jersey that has also been encouraging."

Well-regulated medical cannabis or adult use state markets can usually generate at least 10% of total sales, Hunt said.

"The total economic impact when accounting for direct and ancillary job creation is often in the billions of dollars in states with a decent sized population," he said. "We are already seeing this in the earliest adopting states with robust markets."

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