First of all, why do we want to invest in US equities over Canadian equities? There are multiple reasons:
- US stocks tend to outperform Canadian stocks;
- More access to various companies and industries (Canada is over-concentrated in financials, energy, materials, and industrials) whereby the US is dominated by healthcare, consumer staples, technology, etc.
- Better liquidity -> US market is fairly efficient with tons of market makers providing liquidity. Take a look at the bid-ask spreads!
- Diversification through foreign investment.
With the advancement of the capital markets industry, buying US stocks is quite simple these days with online brokerages. To give you some context, buying US stocks is done through US exchanges – NYSE and NASDAQ. If you have USD, it is quite simple to purchase US stocks, as it is similar to buying Canadian stock with CAD, except now you are paying US commission fees.
But for most of us with CAD, how do we purchase US stocks? Most online brokerages will automatically convert your currency when you buy a US stock, but they will charge you a 2% conversion fee. For transactions with small amounts of money like $1000, you’ll be paying a charge of CAD 20, which is not too bad, but for big transactions above $10,000, paying $200 is probably not worth it. Hence, I would recommend using Norbert’s Gambit.
Norbert’s gambit is excellent for avoiding huge conversion fees, and it isn’t too difficult to execute. However, it will cost $10 in commission fees and take 3-4 days to execute. So if you have time and not in a rush, it is advisable to use this instead of being at the brokerage’s whim of conversion fees.
Buying Through Brokerages
This portion will be about how to purchase US stocks through brokerages. Some brokerages have special deals/promotions for a limited time if you join now, but it’s simply not worth it unless you are trading for a short period of time and only making a few trades. Most established brokerages are capitalizing on amateur traders looking to get rich quickly. So, it is much better to look for a brokerage with great customer service, cheaper fees over a long time period, and an easy-to-use interface for those of us trading for the long haul. We recommend Questrade as it is our personal brokerage.
Executing US Trades
For simplicity, this article will be using Questrade as the brokerage to show you the ease of purchasing US stocks.
1.Go to Questrade.com.
2. Log in to your account and verify your account if needed.
3.Click the green “Trade” button in the header at the top right.
4. Search for the ticker for the US stock you want. In this case, we will be searching for SPY. It should auto-populate the tickers once you type in the ticker name. Make sure you have “STK” selected as “OPT” is for trading options.
5. Click Buy/Sell, and an order entry prompt will open. Here, you can select the number of shares you want to buy and other parameters. When buying your stock, make sure you set it to “Limit” as an order type. This will ensure you purchase your stock at the price you want to buy it at. In terms of setting the limit price, you can set it at the “Ask” price. The bid/ask is the spread between orders between buyers and sellers. You can remember it as the bid for buyers selling at the bid price and ask for sellers selling at the asking price.
6. After you’ve sent in your order, it will take a few seconds or minutes for your order to be filled. Typically, if you set your limit price at the asking price, you should be able to find a seller almost instantaneously.
And that’s it; you’ve purchased your first US stock. Questrade has automatically converted your CAD to USD if purchasing in CAD, and now you own US stocks. Your portfolio will show the shares you’ve purchased split into CAD/USD.
There will be a follow-up article on this when performing Norbert’s Gambit with those much bigger transactions. Have any questions about purchasing US stocks or any tips and advice? Let us know in the comment section below!