Investing in Cannabis: The Bid-Ask Spread

Before you get into the nitty gritty of the different choices you have when placing an order to buy or sell shares in a cannabis company, you should be familiar with the concept of the bid-ask spread. The bid-ask spread is the difference between the price a buyer is willing to pay for shares and the price a seller is willing to accept. This difference is the transaction cost—what the brokers and other market makers earn as a commission for executing the order.

Several factors impact the bid-ask spread, including the following:

• Liquidity: How quick and easy it is to buy and sell shares, which is related to the daily volume of shares exchanged. Stocks that trade in large volumes tend to have a lower bid-ask spread.
• Volatility: Swings in share prices. When share prices are volatile, the bid-ask spread tends to widen.
• Share price: Lower share prices tend to widen the bid-ask spread, mostly because stocks with low share prices are in less demand.
• Supply and demand: Stocks in high demand and low supply have a narrow bid-ask spread. Stocks in high supply and low demand have a wider bid-ask spread.

When you view a detailed stock quote or choose to buy or sell shares online, the online broker typically displays the bid and ask price, as shown. Here, the bid for Organigram Holdings, Inc. (OGI) is $1.22 and the ask is $1.31, which means the spread is $0.09, which is nearly 7 percent—a high price to pay for simply buying or selling one share.

The bid-ask spread is a hidden cost to investors, but it’s not all that hidden. Perhaps more importantly, the spread can help you gauge the supply and demand for a stock and its liquidity. A large spread may be cause for concern. Unless demand increases, selling your shares later may be difficult or expensive.

How to place an order to buy or sell cannabis stock shares

Placing a buy or sell order is easy. All you do is call your broker or log on to your online brokerage account and specify the name of the cannabis company you want to invest in (or its ticker symbol) and the number of shares you want to buy or sell. It gets more complicated when you start adding conditions and a timeframe for the sale, as explained in the sections that follow.

Here are the steps for entering a basic buy or sell order through an online brokerage:

1. Find the company or stock you want to buy or sell. If you’re selling shares, the stock is included in your list of investments.
2. Click the company’s link to access details about it.
3. Click the Buy or Sell button, as shown. A dialog box appears, prompting you to specify details about the trade.
   Source: Fidelity (fidelity.com)
   
   Click the Buy or Sell button.

   The dialog box includes general information about your account, the company name, the ticker symbol, and settings that enable you to specify the action, order type, and time the order remains in force.

4. Enter your preferences and click the Preview Order button. A preview window appears, as shown, which enables you to verify the details and then place the order or go back to edit it.
   Source: Fidelity (fidelity.com)
   
   Enter your preferences and click the Preview Order button.

   Note that the order shown includes an Estimated Foreign Settlement Fee of $50. Why? Because this order is being placed through a U.S. brokerage for shares in a Canadian company—Fire & Flower Holdings Corp. (FFLWF).

5. When you’re ready to place your order, click the Place Order button. A confirmation dialog box appears, indicating that your order has been received.