How U.S. Investors Can Buy Canadian Cannabis Stocks
February 12th, 2018
Updated on April 30, 2018 by Ryan Allway
Canada has become an important investment destination for U.S. investors following the legalization of medical and adult-use cannabis nationwide. As the only G20 country with nationwide legalization in place, investors have the unique opportunity to invest in licensed producers, which have become important suppliers to both domestic consumers and international markets that have legalized medical marijuana.
Unfortunately, many of these companies trade on Canadian exchanges that are difficult for U.S.-based investors to access through traditional brokerage accounts, such as the Toronto Stock Exchange (TSX), Toronto Venture Exchange (TSX-V), and the Canadian Securities Exchange (CSE). While they may trade over-the-counter (OTC) in the United States, the Canadian shares may offer the best liquidity for investors.
In this article, we will look at how U.S.-based investors can invest directly on Canadian stock exchanges and some important considerations when doing so.
U.S. Brokers that Trade Canadian Stocks
Many U.S. brokers do not permit trading in international stocks, but fortunately, Canadian stocks have become an exception to the rule in some cases. For example, TDAmeritrade enables you to place phone orders for stocks on Canadian stock exchanges, but the pricing is often significantly higher than online trades. The good news is that there are some brokerage accounts that do permit online trading in international markets.
InteractiveBrokers is the most popular U.S. brokerage for international traders. With both fixed and tiered pricing, retail and professional investors can use the platform to minimize fees and maximize their returns. The minimum balance for individual accounts is $10,000, but those 25 and younger need just $3,000 and IRAs qualify with just $5,000.
PennTrade is an easy-to-use broker, but they charge an expensive $29.95 commission. The upshot is that this commission is offset by no extra charges for market orders, limit orders, large volume, small volume, or stocks trading under $1.00 – and every tenth trade is free. The minimum requirement to open an account is also just $500.
Questrade charges between $4.95 and $9.95 per trade with no minimum balance, but there are a lot of other fees that may be included. There is also a $5.00 flat per-day commission for days where you trade a U.S. dollar security in your account, which means that it’s best when used exclusively for holding Canadian stocks.
There are many important considerations for U.S. investors when placing trades on international stock exchanges, like the TSX, TSX-V, and CSE.
The first thing to remember is that prices are expressed in Canadian dollars, which fluctuate in value relative to the U.S. dollar. Some brokers provide an easy way to convert Canadian dollars into U.S. dollars, but it’s important to double check to avoid any surprises. On one hand, investing in Canadian dollars provides a higher level of diversification, but on the other hand, a relative increase in the U.S. dollar could have negative consequences.
It’s also important to consider all of your options. In some cases, American Depositary Receipts (ADRs) or over-the-counter versions of the stock may be preferable in terms of liquidity. You may also prefer the OTC version of the securities for other reasons, such as not having to worry about the Canadian dollar’s movements, lower trading fees, or just less complexity to worry about when managing your portfolio.
Finally, you may be responsible for paying foreign taxes on international capital gains and dividends. The good news is that Canada has a deal with the United States to avoid double taxation, but you may be required to make extra filings during tax time. You should consult your financial or tax advisor to learn more about how investing directly on Canadian stock exchanges may impact your tax situation.
Due Diligence Tips
Many Canadian stocks do not file with the U.S. Securities & Exchange Commission (SEC), which makes analyzing them more difficult for investors accustomed to 10-Q quarterly reports, 10-K annual reports, and other regulatory filings. While some dual-listed companies do file with the OTC Markets, separately, they are not obligated to do so unless they trade on the OTCQB or OTCQX, and even then, they may only be required to file Canadian filings.
Investors looking to conduct due diligence on these companies should look at Canada’s SEDAR, which is the equivalent to the U.S. SEC. Using that system, they can look up common filings, including quarterly reports, annual reports, and management discussion and analysis (MD&A).
The Bottom Line
U.S. investors looking for exposure to Canadian stock exchanges have several options, but they should carefully consider their decision before jumping in. In general, Interactive Brokers offers the most attractive account for these investors, but you may also want to consider others that are based in Canada and accept U.S. clients.
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