Current FNN subscribers may have noticed that some of the companies we cover are first listed on one of the Canadian stock markets. These include two junior stock exchanges: the Canadian Securities Exchange (CSE) and the TSX Venture Exchange (TSX-V ), along with Canada’s big board, the Toronto Stock Exchange (TSX).
Many emerging companies in North America find it easier to first get their public listing in Canada as the regulatory hurdles are generally more friendly to smaller upstart companies, with many brokerage firms supporting and providing capital in the process.
I should mention that I am seeing an increase in US-owned early-stage companies first listing in Canada with a follow-up listing in the US. My research suggests there is a country-wide appetite from multiple banks and brokerage firms to support these early-stage companies in order to get them financed and launch their IPO in Canada first.
The main US small or microcap exchanges and regulatory bodies, including the OTC Markets, Nasdaq, FINRA and the SEC, all take an antagonistic attitude to smaller US companies — including start-ups trying to get listed in the US markets. This can be attributed to an overabundance of caution while trying to protect US investors.
The end result is that new stocks often begin trading in Canada while their applications to the US markets are reviewed and approved.
As a savvy investor, you know that getting in early is key to realizing explosive gains in any stock. Waiting one or two months for a company to begin trading in US markets can make a huge difference in your profits!
In this article, I will go over the fundamentals of the Canadian stock markets and provide you with some solutions on how you can begin trading Canadian stocks early from here in the US.
Canada, Oh Canada!
Canada is one of the wealthiest nations in the world with a reported nominal gross domestic product of $1.73 trillion for 2019 according to the World Bank.
Their economy is stable with low rates of inflation, and due to COVID-19, reasonable budget deficits.
There are many investment opportunities in Canada. Interest has been steadily growing in Canadian equities, especially since the legalization of marijuana. But the breakout cannabis industry is only one of many opportunities that lie just north of the border.
The technology sector is booming; mining of gold, copper, silver and other metals is huge; and of course, there is the oil and gas industry in the Provinces of Alberta and the Maritimes, which has recently seen an uptick in interest.
As I mentioned above, many companies today will have multiple listings in markets around the world. This is done to expand reach and appeal to a greater number of potential investors, which can be critical for early upstart companies in order to raise investment capital — especially companies looking to raise additional funds post going public.
The regulatory requirements in Canada are more straight forward and easily understood, and because of this, possibly seen as more accommodating to small companies looking to go public.
Canadian Markets Explained
As mentioned above, Canada hosts three stock exchanges, the Toronto Stock Exchange (TSX), TSX Venture Exchange (TSX.V) and the Canadian Securities Exchange (CSE).
The Toronto Stock Exchange (often abbreviated as TSX) is the country’s senior stock exchange located in Toronto, Ontario. It is the 9th largest exchange in the world by market capitalization ($2.51 billion USD as of this writing).
More mining and oil and gas companies are listed on the Toronto Stock Exchange than any other stock exchange in the world.
To follow the overall TSX, you will want to take a look at the S&P/TSX Composite Index. This index tracks the value of some of the biggest stocks on the TSX market, which can account for 70 percent or more of the exchange’s total volume.
Two Junior Exchanges
The TSX Venture Exchange (TSX-V) is headquartered in Calgary, Alberta and has offices in Toronto, Vancouver and Montreal. It was previously known as the Canadian Venture Exchange (CDNX), but in 2001 the TSX Group (now known as the TMX Group) purchased it and renamed it.
The TSX Venture Exchange is a public venture capital marketplace for emerging companies. It is like the NASDAQ Small Cap or OTC Market exchanges in the US.
This is where you will find listings for up-and-coming or smaller companies.
Companies listed on the TSX-V market often have less of a track record and may be in development stages compared to the larger companies that are listed on the more senior qualified TSX Exchange.
To follow the TSX Venture Exchange, you will want to look at the S&P/TSX Venture Composite Index.
The index is comprised of 10 companies from each of five industry sectors:
- Clean Technology & Life Sciences
- Diversified Industries
- Energy & Energy Services
Companies are selected based on three equally weighted criteria:
- Market Capitalization Growth
- Share Price Appreciation
- Trading Volume Amount
The combined market cap of the Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSX-V) hit record levels again in 2020. The aggregate market cap for the two exchanges grew to $3.2 trillion, the highest level in the history of the exchanges.
There are 1,572 companies listed on the TSX, and about 1,673 on the TSX Venture Exchange.
One of the newer exchanges in Canada is the Canadian Securities Exchange (CSE).
Formerly known as the Canadian National Stock Exchange (CNSX), the CSE was founded in 2003 as an electronic stock exchange.
Also known as “the exchange for entrepreneurs,” the CSE is an alternative for emerging small and microcap companies looking to access Canada public capital markets with simplified reporting requirements and reduced barriers to listing.
The CSE exchange can be followed at CSE Composite Index. The index was started in 2015 and covers about 75 percent of equities listed on the exchange.
The CSE exchange offers simplified reporting requirements and also reduces the barriers to listing.
It has eliminated wait times for transaction approvals or reviews, and also cuts down on the cost and time for companies to get a listing.
What Are the Major Differences Between the US and Canadian Markets?
Currency: The Canadian stock market is traded in Canadian dollars, not US dollars.
You will need to check the current exchange rate of the Canadian dollar vs. the US dollar to know the value of the stock you are interested in. At time of publication, one US dollar will get you $1.28 Canadian dollars.
Purchasing Canadian stocks can also be a hedge against any devaluation of the US dollar. If the US dollar goes down, the value of your investment in Canadian stocks (the value of Canadian dollars) will not be as affected.
But this can also work against you in the case that the Canadian dollar goes down against the US dollar.
Be aware there might be currency fluctuations when trading cross border.
Different laws: Canada has its own laws concerning stocks and taxes on gains. While only applying to Canadian dividend-paying stocks; the Canadian government actually claims some tax on dividends paid to United States residents (and residents of all other non-Canadian countries). More specifically, the Canadian tax authority, which is called the Canada Revenue Agency, generally withholds 30% of all dividends paid to out-of-country investors.
Fortunately, this 30% is reduced to 15% thanks to a tax treaty shared by Canada and the United States.
Another difference is the types of stocks available to US investors. The Federal legalization of recreational marijuana in Canada means that there is an entire sector of related stocks available that you might not have access to in the US. I am also seeing an incredible climb in psychedelic stocks being listed in Canada, which is shaping up to become a really hot sector.
You should consult your tax professional concerning how to account for gains in Canadian stocks.
Hours of Operation: All Canadian markets operate the same hours as the major US markets: 9:30 a.m. to 4:00 p.m. EST, Monday through Friday.
The markets are closed Saturday, Sunday, and on major Canadian holidays (not always the same as the US holidays).
Pros and Cons of Trading in Canada
Lower volumes in OTC Markets listed stocks vs. Canadian stocks in most cases:
Many times, the volume traded for the US symbol of a Canadian company can be much lower than the same company’s Canadian market symbol. This lower volume causes problems in two ways. Lower volume equals lower liquidity when selling stocks, and typically a wider spread between the bid and ask price when buying.
Many leading Canadian cannabis stocks trade in the US with a dual listing, but not all of them. Due to issues surrounding the legality of US cannabis stocks listed in Canada, some are not listed on US exchanges or have chosen to stick to trading within Canada only.
And if the company does pursue a US listing, it can often take weeks and possibly months to begin trading here, which can be all the difference when getting in on a new IPO debut.
The TSX and TSX Venture Exchange are two of the top exchanges in the world for stocks related to natural resources. Canada is one of the largest exporters of minerals in the world, and their reserves of natural gas and oil are well known.
Again, while many of these commodity-related stocks are available in the US as dual listings, there are many up-and-comers that are only listed on Canadian exchanges.
Sounds Good. How Do I Start Trading?
First Step: The easiest way to purchase Canadian equities is to search for the company on an American exchange. Research to find out if the company has a listing on NASDAQ, the NYSE or OTC Markets.
If they do have a listing in the US, you can easily purchase those equities through your broker or online trading account such as Questrade or TD Ameritrade.
If you do not see the company listed on a US exchange, then you will need to consult with your broker or online trading account platform to see if they offer international trading.
Today, many of the online trading platforms allow international trading and it is actually quite easy to setup. Usually it only takes filling out a separate form asking permission to trade international stocks and getting approval.
Check out our suggested online brokerage firms here
Many US online discount brokerage firms allow the purchase of securities on the TSX, the TSX-V and CSE markets.
One thing to note is that trading in international stocks does come with different fees and commission structures. You will want to consult with your broker or online trading platform to confirm those fees before trading.
You can also purchase stocks through a licensed broker. There are plenty of brokers who are licensed with the TSX who can help you with your Canadian investment plan. You can find those brokers online by going to the TSX website and viewing their listings here.
Another easy way to invest in Canadian companies is to look into Canadian exchange-traded funds or ETFs. ETFs are similar to mutual funds in that they track a certain index or a variety of assets. These can be found through your broker or online trading platform and can be purchased the same way as any US-listed stock or fund.
Canada, with its stable economy and home to one of the largest stock exchanges in the world (TSX), as well as not one but two junior stock exchanges with multiple new listings for emerging companies, is an excellent place to start if you seek an early entry.
The Toronto Stock Exchange offers a wide variety of investment opportunities not always available as US listed equities.
For those investors interested in small and microcap opportunities, the TSX Venture (TSX-V) and the Canadian Stock Exchange (CSE) are home to many new and emerging growth companies.
I recommend taking a closer look at trading Canadian stocks, especially for tracking new up and coming securities debuting in Canada.
There are many opportunities, particularly on the speculative side, that US investors do not have exposure to early on. These include opportunities in metals, specialized technology, cannabis and the newly emerging psychedelics space, among others.
As always, do your research carefully, especially when first getting started in a foreign exchange. While there are many similarities, it’s important to be aware of the differences before investing.
MF Williams, Contributor
for Investors News Service
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