How to Buy Canadian Stocks in U.S.

This article is for beginners or for people who have never purchased Canadian stocks in the U.S.

Buying Canadian stocks could be a little bit tricky since an average U.S. broker does not have access to the Toronto Stock Exchange where most junior mining stocks are being traded. I know some brokers do offer global accounts that have access to international markets, but I believe majority like Fidelity and Trade King do not offer that access.
First of all let’s get into basics of Canadian stock symbols, take Eastmain Resources for example, which is traded under symbol ER.TO.

ER - First letter or letters before the period represent stock symbol.
.TO - second part of the symbol after period (.TO) stands for a specific stock exchange in Canada where this stock is being traded and listed.

There are two stock exchanges in Canada, The Toronto Stock Exchange that is symbolized by TO and the TSX Venture Exchange, which is symbolized by V.
So if we take another example, The Hathor Exploration with a symbol of HAT.V. Stock symbol is HAT and it is traded on the TSX Venture exchange. If you are looking for quotes or charts you can go to Yahoo! Finance or StockCharts.com - Simply the Web's Best Stock Charts, and input the full symbol HAT.V to get a quote.
So now we know that there are two exchanges in Canada, how symbols work and where you can get the latest price or a chart for your stock.

Second main point is if your broker does not offer access to the Toronto exchanges you most likely have an option to purchase an ADR of the underling stock. ADR or American Depositary Receipt is a stock that trades in the United States but represents a specified number of shares in foreign companies. ADRs are traded under American exchanges and all brokers in US should have access to it. You should be able to find an ADR if you search by name in your brokerage account. Not all canadian stocks have ADRs, and if you can't find it at your broker most likely it doesn't exist. For example, in E*trade (regular and not global account) if you search for Eastmain Resouces it comes out under symbol EANRF which is an ADR for ER.TO. Keep in mind most of the time these ADRs are illiquid and have a wide spread between the bid and ask price. Illiquidity means not many shares are being traded daily and it could hurt you if you are trying to get out of a large or even medium size position. Also, along with illiquidity comes wide spreads between bid and ask prices, which stands for price other investors or traders are willing to buy or sell that security. Since the volume on ADRs is usually low, it is the market markers that set bid and ask, and they set it to whatever is profitable to them and not to you. At times it could cost you as much as 5-7% on the slippage, just because you purchased and sold an ADR. Because of that I do not recommend to use ADRs for Canadian stock purchases, but if you don’t mind the slippage, it is one of the options.

Another thing to keep in mind is the exchange rate; the price for ADRs would usually be adjusted for the exchange rate of the CAD to USD currency. For example, if ER.TO in Canadian currency is 1.50 and the exchange rate is 0.99, the same stock will cost 1.50 x 0.99 = $1.485 in US. For latest exchange rates you can use XE.com - The World's Favorite Currency and Foreign Exchange Site. Since we are purchasing stocks in USD, Canadian currency rate will also affect the stock price, for example if you bought $20,000 USD in Canadian stocks while currency rate was 1.00 so you would have 20,000 in Canadian stocks in Canadian currency, but if the rate went up to 1.02 your 20,000 will become 20,000 CAD x 1.02 = $20,400 in USD. That’s of course is the best-case scenario. It will have a negative impact if the rate decreased.

Another alternative, is PennTrade.com which specializes in Canadian stocks, but trades are very expensive. If you have access to actual canadian tickers like Interactive Brokers do, I don't see a reason why you would be paying a lof of money to trade on PennTrade.

Over the Counter is another option.
Most Canadian listed junior mining stocks have available OTC (Over-the-Counter) or Pinksheet stocks that trade in the US. These can typically be identified by their 4-5 ticker symbols. For example, the company Serengeti Resources which trades in Canada on the TSX Venture exchange under the symbol SIR.V has an OTC ticker which trades under the symbol SGRNF. There are a number of reasons these OTC tickers exist. First and foremost from the companies perspective, it provides for more liquidity by adding an investment audience which would not exist otherwise at a marginal cost. The small resource juniors we follow, most often do not meet the stringent listing requirements that the bigger exchanges require (NYSE, AMEX), which also explains the 2 tier system that exists between the bigger Tier 1 Toronto listings and the Tier 2 Venture listings on the TSX exchange. As a result, they turn to the OTC and pinksheet exchanges which have incredibly lenient listing requirements. It is important to keep in mind that if you have access to the Canadian listing for a Canadian stock, this should be your option of choice. OTC listings tend to be illiquid and are subject to high bid/ask spreads. Since these listings are much more illiquid, the market makers have a much easier time moving these issues up and down and picking investors off.

One of the most important rules when investing in junior mining stocks is to use limit orders every time. Never use a market order unless it is a large issue with a high degree of liquidity. Since most of the junior mining stocks have miniscule market caps and very small floats, even a small amount of buying ($5000 -$10,000) has a tendency to move the stock around by siginificant percentages. If you use a market order to fill a large order on a small issue, be fairly warned that you may be very surprised by your fill prices.

Finally, the preferred way to purchase Canadian stocks is to find a broker with direct access to international exchanges. The one I’m currently using is Interactive Brokers, or IB. They let you purchase stocks directly from Canadian exchanges without ADRs. Also, I like that you pay very small commissions in IB, on average it costs $2.50 per trade, where it would cost me 12.99 to buy an ADR in E*trade. Keep in mind that if you want to buy Canadian stocks directly you first have to convert your US dollars into Canadian currency, and conversion has its own $2 commission, but that is a very small amount comparing to the average broker commissions and slippage on ADRs. Looking back at E*trade, they do offer a global accounts where you can buy stocks directly from international exchanges, however they do charge very high commissions on those trades and it currently it runs about $20 per trade in local currency.

I hope this helps. Any comments or suggestions are welcome!



Pip and Sergey
Gold Speculator - Investing in Gold, Silver and Commodities

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