Are you interested in trading U.S. stocks in Canada? Buying U.S. stocks in Canada is one of the best ways to diversify your investment portfolio. It will also give you exposure to top-performing sectors in the U.S. market, such as the consumer sector.
As a Canadian investor, you should have 20-30 percent of your investment portfolio in the U.S. stocks. However, buying U.S. stocks in Canada can be quite tricky when you don’t understand the complexities involved. Keep reading and learn how to go about it.
How to Invest in U.S. Stock Market from Canada
As you contemplate trading U.S. stocks in Canada, you need to consider factors that can potentially affect your investment portfolio. The two main factors to consider when making an investment decision are currency exchange rates and investment sectors.
Currency Exchange Rates
If you’re a Canadian buying U.S. stocks, there’s no doubt you’ll need foreign exchange services to convert CAD to USD, or vice versa. Since exchange rates keep fluctuating, it can affect your returns, either positively or negatively. Here is an excellent example:
- Let’s say you plan to invest in a U.S. firm trading shares at US$20 each. To buy 200 shares, you will need around US$4,000.
- If the exchange rate is 1.35 CAD per USD at the time of buying the stocks, you’ll need around CA$5,400 to close the deal.
- After five months, the company’s shares’ price increases by 20 percent up to US$24 per share. Your investment portfolio in U.S. stocks will read US$4,800.
- That means you’ll pocket around US$800 as profit before converting it back into Canadian dollars.
- If the exchange rate remains at 1.35 CAD per USD, and you convert your earnings into Canadian dollars, you’ll receive CA$6,480.
- However, if the strength of Canadian dollars rises sharply up to the point where 1.20 CAD is equal to one USD, your investment amount in CAD will reduce.
- When converted at the rate of 1.20 CAD per USD, you will get around $5,760 in Canadian dollars, and not CA$6,480.
- You realize that your investment is down with around CA$720 even though the U.S. company’s shares increased in prices.
So, whenever you invest in a foreign market, you bet on two essential things, a company’s performance in the stocks market and currency exchange rates. Generally, you should invest in stocks projected to perform better in the future.
The brokerage firm that holds your investment will also charge exchange rates when investing in a foreign market. If you buy U.S stocks in Canadian dollars, select a brokerage company that will convert CAD to USD at a favorable rate.
For instance, if the actual exchange rate is 1.35 CAD per USD, you might end up paying 1.38 CAD per USD when buying U.S. stocks in Canadian dollars. That means you’ll pay CA$5,520 for 200 shares, at US$20 per share, instead of CA$5,400.
The brokerage firms will also charge fees when selling the U.S. stocks to get proceeds in Canadian dollars. Instead of exchanging the money at the rate of 1.20 CAD per USD, the brokerage can convert it at the rate of 1.18 CAD per USD, reducing your earnings.
If you want to save money on currency exchange fees, you should convert CAD to USD in a reputable currency exchange company, such as Knightsbridge FX. It provides the best currency exchange in Ottawa, helping clients save thousands of dollars.
Investment Sectors in the U.S. Stocks Market
When buying U.S. stocks in Canada, it’s essential to invest in companies that guarantee huge returns. Besides, the shares should offer protection against market downturns and recessions. The primary investment sectors in the stocks market include:
- Utility sector
- Finance sector
- Consumer sector
- Natural resources
- Manufacturing and industry
When buying stocks, you need to invest in sectors that perform best and has the lowest risk levels. In other words, you should buy shares in companies that outperform the overall market. Here is how the five sectors above can affect your investment portfolio.
This sector consists of companies offering gas for heating, water purification, electricity, and sanitation. Since everyone depends on these services, you can predict future performance. These stocks guarantee returns during recessions.
It’s one of the most diverse sectors with several companies, including publicly-traded banks, investment brokerages, and insurance companies. However, investing in the finance sector isn’t a wise idea during recessions as you might end up making losses.
It’s one of the most profitable sectors. Besides, it offers protection against economic downturns due to the continuous and habitual use of consumer products, regardless of economic cycles. Most companies in this sector are involved in food production.
This sector comprises companies engaged in providing natural resources, such as logging, mining, and lumber production. It also includes companies that refine raw materials, such as steel companies, lumber companies, and chemical companies.
Companies in the manufacturing sector also rely on raw materials to generate products. So, if raw materials increase in prices, the stocks in the manufacturing sector suffer as the resources stocks gain. Also, rising wages may ‘hurt’ your manufacturing stocks.
If you’re a Canadian investing in U.S. stocks, you should consider a brokerage company that offers favorable exchange rates. Also, you can convert your CAD to USD at an agency specialized in currency exchange to get the best prices. Also, when trading U.S. stocks in Canada, diversify your investments in top-performing sectors in the economy.