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How to Invest in Canadian Stocks

It is a question we get a lot here at FNN. I’m a US citizen. How do I buy Canadian stocks?

Investing in stocks from other countries can be a great way to diversify your investment portfolio, and Canada is a great place to start.

Canada is one of the wealthiest nations in the world with a nominal gross domestic product of $1.65 trillion in 2017.[1] Their economy is stable with low rates of inflation and very low budget deficits. They posted a budget surplus of 0.8 percent in the first half of 2018, while the US deficit remained around 4 percent of GDP for the same period.

There are many investment opportunities in Canada. Interest has been steadily growing in Canadian equities especially since the legalization of marijuana last year. 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.

While some companies do have dual listings (listings on both Canadian and US markets), there are many more that are only available on one of the Canadian exchanges.

There are three stock exchanges in Canada, the Toronto Stock Exchange (TSX), TSX Venture Exchange (TSX.V) and the Canadian Securities Exchange (CSE).

 

Northern Neighbor With 3 Stock Exchanges

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 ($2.095 billion USD as of November 2018). By comparison, NASDAQ has a market cap of $10.857 billion USD.[2]

More mining and oil and gas companies are listed on the Toronto Stock Exchange than any other stock exchange in the world. [3]

To follow the 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.[4]

The TSX Venture Exchange is a public venture capital marketplace for emerging companies. It is like the NASDAQ Small Cap or OTC exchanges in the US.[5] This is where you’ll find lower-priced stocks offered from up-and-coming or smaller companies.

These companies 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 TSX Venture 50 Index. The Venture 50 is a ranking of top performers on the TSX Venture Exchange over the last year. The ranking is comprised of 10 companies from each of five industry sectors:

  • Clean Technology & Life Sciences
  • Diversified Industries
  • Energy & Energy Services
  • Mining
  • Technology

Companies are selected based on three equally weighted criteria:

  • Market Capitalization Growth
  • Share Price Appreciation
  • Trading Volume Amount [6]

The combined market cap of the Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSX-V) hit record levels in 2017. The aggregate market cap for the two exchanges grew by 9% in 2017 to just over $3.0 trillion, the highest level in the history of the exchanges.

Additionally, the combined market cap of the exchanges grew 38% over the past five years.[7] There are over 1,500 companies listed on the TSX, and about 2,000 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 2001.

Also known as “the exchange for entrepreneurs”, the CSE is an alternative for small and microcap companies looking to access Canada public capital markets with simplified reporting requirements and reduced barriers to listing.[8] [9]

Substantially smaller than the TSX, the CSE lists over 200 equities, government bonds and other structured products. Many of the US-based cannabis companies are listed on the CSE.

 

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. As of this publication, one US dollar will get you $1.33 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. 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.[10]

Another difference is the types of stocks available to US investors. The recent 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.

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 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.

Access: Many 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.

And if the company does pursue a US listing, it can often take weeks to begin trading, which can be all the difference when getting in on a new IPO debut.

Commodities: 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 Charles Schwab, E*Trade 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.

While many US online discount brokerage firms allow the purchase of securities on the TSX and the TSX-V, the CSE is not quite there yet. That can make investing in CSE equities difficult to purchase as a US-based investor. The solution is to look for a US-based broker that specializes in the CSE.

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 via a Google search or by visiting this link: TSX licensed brokers.

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.

 

In Conclusion

Canada, with its stable economy and home to one of the largest stock exchanges in the world (TSX), is an excellent place to diversify your portfolio.

The Toronto Stock Exchange offers a wide variety of investment opportunities not always available as US listed equities. And for those investors interested in small and microcap opportunities, the two junior markets, the TSX Venture and the Canadian Stock Exchange, are home to many new and emerging growth companies.

In my opinion, it is worth taking a closer look at trading in Canadian stocks.

There are many opportunities, especially on the speculative side, that US investors do not have exposure to. These include opportunities in metals, specialized technology and cannabis, 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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DISCLAIMER: Investing in any securities is highly speculative. Please be sure to always do your own due diligence before making any investment decisions. Read our full disclaimer here.

Published February 2019

Sources:

[1] https://www.thebalance.com/invest-in-canada-buying-canadian-stocks-and-bonds-1979051

[2] https://www.worldatlas.com/articles/biggest-stock-exchanges-in-the-world.html

[3] https://en.wikipedia.org/wiki/Toronto_Stock_Exchange

[4] https://en.wikipedia.org/wiki/TSX_Venture_Exchange

[5] https://www.thebalance.com/what-is-the-tsx-venture-exchange-tsx-v-1979065

[6] https://www.tmxmoney.com/en/investor_tools/venture50_mobile.html

[7] https://www.investmentexecutive.com/news/research-and-markets/tsx-tsxv-market-cap-hit-new-record-in-2017/

[8] https://nssc.novascotia.ca/before-you-invest/question-week-how-many-stock-exchanges-exist-canada

[9] https://en.wikipedia.org/wiki/Canadian_Securities_Exchange

[10] https://www.suredividend.com/canadian-taxes-us-investors/

MF Williams

MF Williams graduated from the University of California at Davis, and became involved in banking and finance working for BNP Paribas North America in New York City. He soon found his true passion in small and microcap sector stocks, with their dramatic potential for upside growth. With over 18 years of experience analyzing and researching emerging small cap public companies, his insight and skill set are unmatched.