(Photo via Flickr)
As we've covered in prior articles, some foreign-listed cannabis companies' shares also trade over-the-counter here in the United States. This can make it easier for companies listed on the Canadian Securities Exchange ("CSE"), Toronto Stock Exchange ("TSX"), Australian Securities Exchange ("ASX") and beyond to reach investors in the United States. Not only are more U.S. brokers OTC-enabled than internationally-enabled, but OTC listed shares are also quoted in USD.
This all sounds really good so far, but there are some drawbacks to trading foregb-listed shares through the pink sheets. If given the choice, serious marijuana stock traders should look to trade directly through the foreign exchanges that the company is listed on rather than the OTC markets.
There are way fewer market participants active in the OTC markets, and therefore liquidity is the number one concern. Take CannaRoyalty Corp. for example. The company is natively listed on the CSE under the symbol CRZ, but also has a listing on the OTCQX market under the ticker CNNRF. See for yourself below:
The lack of market participants can lead to spikes in volatility on very low volume. There are so few shares offered at the bid and the ask on the OTC markets that a small buy or sell order could send shares moving. Conversely, on the CSE there's enough liquidity on both the bid and the ask to accommodate trading without too much slippage.
Today on the OTC markets, 25,539 shares changed hands, with a 30 day average volume of 22,788 shares. On the CSE, 81,227 shares were exchanged. That liquidity can make a huge difference!
(Photo via Pixabay)
#2: Trading Costs
Trading a foreign stock through the OTC markets can have some added costs that many investors don't consider. Since some bank or brokerage is acting as a intermediary between the OTC markets and the native exchange, they pass those costs on to the trader.
Beyond this, they also pass on the spread associated with exchanging your domestic currency for the foreign one or the other way around. This all adds up!
Now that I've mentioned the foreign exchange spread, I should mention the bid-ask spread. The bid-ask spread (the difference between the highest bid to buy and the lowest offer to sell) can be far wider on the OTC markets. This makes market orders deadly.
If you are going to use the OTC markets to trade these foreign listed marijuana stocks, at least use limit orders to protect yourself somewhat!
In order to avoid the OTC markets for the cannabis companies with listed shares on foreign exchanges, you'll need a brokerage that offers access. Unfortunately, E*Trade no longer offers direct foreign market access, however Fidelity does! As for the commission-cutting traders who only use Robinhood, you'll have to wait for both OTC and foreign-listed access.