What Are OTC Markets?

Over-the-Counter (OTC) markets are decentralized trading networks where securities are traded directly between parties without a centralized exchange. Unlike major exchanges such as NYSE or NASDAQ, OTC markets operate through dealer networks and electronic trading systems, facilitating transactions for securities that don't meet listing requirements of major exchanges. The OTC market is divided into three tiers: OTCQX (highest tier for established companies), OTCQB (venture marketplace for developing companies), and Pink Sheets (most speculative tier with limited disclosure requirements). As of 2024, over 10,000 securities trade on OTC markets, including many cannabis companies. For cannabis investors, OTC markets are particularly significant because federal regulations prevent many cannabis companies from listing on major U.S. exchanges. Companies like Curaleaf (CURLF), Cresco Labs (CRLBF), and Green Thumb Industries (GTBIF) trade on OTC markets despite generating hundreds of millions in revenue. In 2023, the cannabis sector represented approximately 15% of all OTC trading volume. OTC trading typically involves higher bid-ask spreads, lower liquidity, and increased volatility compared to exchange-listed stocks. Transaction costs are often higher, with spreads ranging from 2-10% for cannabis stocks versus 0.1-0.5% for major exchange stocks. Market makers provide liquidity by maintaining bid and ask prices throughout trading sessions. Investors should exercise caution when trading OTC securities due to limited regulatory oversight and disclosure requirements. Pink Sheet companies may have minimal reporting obligations, while OTCQB companies must meet basic disclosure standards. The lack of stringent listing requirements can result in higher investment risks, including potential for market manipulation and limited financial transparency. Despite these challenges, OTC markets provide essential capital access for cannabis companies operating in a federally restricted industry, enabling institutional and retail investors to participate in the sector's growth while companies work toward eventual major exchange listings.