Buying US Stocks in Canada (2022): 3 Different Ways

Often viewed as a benchmark for reasonable stock returns, the S&P 500 index has offered an annualized average return of around 10.5% from 1957 to 2021.

Because of these excellent long-term performance numbers, US stocks are almost always considered an attractive asset class under the right circumstances.

Here in Canada, it is fairly common for investors to have a portion of their accounts allocated to US investments, including US stocks.

If you are looking to buy US stocks in some or all of your accounts, there are three approaches that you can take:

  • Buying US stocks in Canada through a discount brokerage
  • Having US stocks purchased for you through a Robo-advisor
  • Working with an investment or financial advisor to purchase US stocks

Should I Buy US Stocks in Canadian Dollars?

Should I Buy US Stocks in Canadian Dollars?

The first thing to understand if you are looking to buy US stocks directly in any account is that they have to be purchased using US dollars.

Although there are a few ways to convert between Canadian and US dollars (which will be covered later on), buying US stocks adds an additional layer of complexity to your portfolio – foreign currency fluctuations.

Fluctuations between the US dollar and the Canadian dollar will affect your total returns in CAD if you hold US securities.

Can I Buy US Stocks in my Canadian TFSA?

Can I Buy US Stocks in my Canadian TFSA?

US stocks can be held in a Tax-Free Savings Account.

Although the TFSA allows you to avoid Canadian taxes, you will still be responsible for US foreign withholding taxes. With regards to US stocks, this applies to the dividends that you should receive as a shareholder.

While a hypothetical US stock might pay a $100 dividend, you would only receive $85 in your TFSA due to US foreign withholding tax. The 15% US foreign withholding tax can’t be refunded within a TFSA account.

For the same US dividend-paying stock held in other accounts, there are specific instances in which you can apply for a foreign tax credit to eliminate the impact of the US foreign withholding tax.

If you are looking to purchase US stocks in your TFSA, make sure to add stocks that pay minimal dividends.

We will cover how to buy US stocks across your accounts below and discuss each approach in more detail.  

Approach 1: Buying US Stocks through a Discount Brokerage

Approach 1: Buying US Stocks through a Discount Brokerage

You can purchase US stocks in virtually any Canadian investment account through the use of a discount brokerage.

A discount brokerage gives you full control over your investments. Since you will be entirely responsible for the trading of the US stocks in your account, you will not be paying an advisory fee.

The five steps for buying US stocks through a discount brokerage are:

  1. Plan which US stocks to buy
  2. Open an investment account with a Canadian discount brokerage
  3. Converting Canadian dollars to US dollars
  4. Buy your stocks
  5. Monitor your investments over time

Step 1 – Planning Which US Stocks to Buy

Before making a decision to invest in anything, you must first decide if US stocks are an appropriate asset class for your portfolio.

Stocks are generally categorized as medium-risk investments by most brokerages in Canada. Stocks are riskier than bonds and can fluctuate quite a bit during periods of market turmoil.

Performing an appropriate level of research around your US stock picks is critical. In a professional setting, portfolio managers and research analysts typically study a company’s financial statements thoroughly before offering an opinion on its stock.

In order to reduce the likelihood of mistakes when trading, make sure to write down the ticker and exchange of each US stock that you will be purchasing.

Step 2 – Opening a TFSA at a Canadian Discount Brokerage

A lot of banks and financial institutions in Canada offer discount brokerage accounts. For low-cost options, consider Questrade or Wealthsimple.

Experienced investors and traders will want to try Interactive Brokers, which comes with a more sophisticated platform.

Other examples of possible Canadian discount brokerages include those offered by the banks and some credit unions.

If you are purchasing US stocks, you will need to make sure that the brokerage supports US dollar accounts. US stock purchases have to be made on the US side of your investment accounts and in US dollars.

The opening of an investment account will require a lot of personal information as well as government-issued photo identification.

Step 3 – Converting Canadian dollars to US dollars

As mentioned before, US stocks will always have to be purchased in US dollars.

If you have funded your account entirely with Canadian dollars, most discount brokerages will still allow you to buy US stocks directly.

You can search for a US stock ticker through your discount brokerage and place the trade. The brokerage will automatically convert your money to US dollars to complete the purchase.

Since discount brokerages charge fairly high conversion rates, there are usually better ways to convert your Canadian dollars to US dollars.

One way to potentially reduce the fees that you are paying for Canadian to US dollar conversions is through Norbert’s Gambit.

What is Norbert’s Gambit

Norbert’s Gambit is a strategy for converting Canadian dollars to US dollars or vice versa. It can make sense in certain situations and save you quite a bit in conversion fees.

Instead of paying a conversion fee, you are only paying for two trades – a buy and a sell.

The three steps involved with Norbert’s Gambit are:

  1. Purchasing a security (usually DLR.TO and DLR.U.TO) that trades in both US and Canadian dollars
  2. Calling your broker and asking them to “journal” the security to the other currency
  3. Selling the security, which is now in the other currency, once it settles

Norbert’s Gambit is fairly straightforward when using Questrade. If currency markets are stable and you are looking to convert a large amount of money, this strategy can save you quite a bit in conversion fees.

You can also convert between US dollars and Canadian dollars for specific amounts. Each discount brokerage has a different platform, but it can always be done online or over the phone.

Keep in mind that these trades also cost the same currency conversion fee as if you were to purchase a US stock trade directly.

Step 4 – Buying the Stocks

Once your account is ready for trading, it’s time to begin buying your researched US stocks. There are two main ways to place buy orders with most discount brokerages: limit orders and market orders.

Market Orders

The most basic type of order is the market order. The market order is executed immediately once you have inputted your stock information and clicked buy. Market orders have a large drawback: bid-ask spreads.

A stock’s bid-ask spread is what buyers and sellers are willing to pay or sell for. Each price has a specific amount of supply or demand within a stock exchange’s book. Smaller stocks and more illiquid stocks tend to have a wider bid-ask spread.

With a market order, you have control of when a trade is executed, but not over what price it is executed at.

Limit Orders

Limit orders are the opposite of market orders. When you place a limit order, you can control what price to buy a stock at, but not when the stock will actually be bought.

Limit orders are typically open until your shares are entirely purchased or a specific length of time has passed. They are an excellent option if your trade is not extremely time-sensitive.

Your limit order can be placed at any price. If you place a limit order to buy a stock for more than it is currently trading at, you will likely be filled immediately at the lowest possible price.

Alternatively, if you place a limit order to buy a stock at a price below its current market value, you will have to wait until the stock price reaches or drops below your inputted price.

We highly recommend using limit orders early on in your investing journey. Placing a limit order around the current market price will allow you to know exactly how much you will be investing in each stock.

Step 5 – Monitoring your Investment Accounts

Monitoring your stocks over time is a key step toward long-term investment success.

US stocks can face several events which affect their stock price. Some examples include:

  • Any changes in a stock’s dividend
  • Starting a share repurchase program
  • Doing a stock split or reverse stock split
  • Declaring bankruptcy

Goals, objectives, and risk tolerance can all change over time. Be mindful of your overall stock exposure over time, and if it continues to be appropriate given your current situation.

Approach 2: Buying Stocks through a Robo-advisor

Approach 2: Buying Stocks through a Robo-advisor

An alternative to buying stocks yourself through a discount brokerage account is to use a Robo-advisor to gain exposure to US stocks.

Robo-advisors are becoming more widespread as technology and algorithms improve. They are designed to replace a human advisor for only a fraction of the cost.

Questrade offers Questwealth, and Wealthsimple offers Wealthsimple Invest.

When Robo-advisory platforms put together a portfolio for you, you can get direct US stock exposure or indirect US stock exposure through an ETF.

Robo-advising does come with its own pros and cons.

Approach 3: Working with an Advisor

Approach 3: Working with an Advisor

US stocks can also be purchased within your accounts by working with an investment or financial advisor. In some cases, your advisor will be managing your money on a discretionary basis.

A discretionary money manager will likely be making trades across your accounts without calling you to confirm trades.

A non-discretionary advisor is forced to call their clients over the phone to confirm any buy or sell orders. They may be able to recommend some US stocks or place trades on your behalf for US stocks that you would like in your accounts.

The fees for working with an advisor are usually higher than for the first two approaches and we do not recommend this option.

Is it Worth Buying US Stocks in Canada?

Is it Worth Buying US Stocks in Canada?

A well-constructed portfolio will always be well diversified across asset classes, sectors, and different geographies.

If you were to build an investment portfolio that resembles only the Canadian stock market, it would likely have some key features. A lot of the stocks in such a portfolio would fall in the energy, materials, or financial sectors.

As the largest economy in the world and with a great long-term performance track record, the US stock market is a great first place to expand outside of the Canadian market.

Conclusion

Buying US stocks across your investment accounts can be a great idea if you are looking to diversify outside of Canada.

Regardless of the account type, US stocks can be purchased either through a discount brokerage, a Robo-advisor, or with the help of an advisor.

Make sure to consider the additional complexity of a portfolio containing US stocks, such as foreign exchange effects and foreign withholding tax on US companies.

If you are still deciding on which US stocks to purchase across your accounts, consider using a stock screener.

Stock screeners can offer an incredible amount of information about a company and help with building a robust portfolio.

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Author Bio - Christopher Liew is a CFA Charterholder with 11 years of finance experience and the creator of Wealthawesome.com. Read about how he quit his 6-figure salary career to travel the world here.

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