Recently I got an email from Ian who is a reader of the blog. One of the questions he asked about was whether he would be better off buying BMO (Bank of Montreal) on a Canadian exchange with Cdn$ or a US stock exchange using US$. He has cash in US$ and wants to buy the shares in an RRSP.
This brings up two interesting points:
1) When you buy stock in a company it doesn’t matter which exchange or currency you buy it in.
If you buy shares of a company on different exchanges in different currencies you are still buying the same portion of that company so it doesn’t matter where you buy it. The difference in price is the currency exchange rate.
As an example if we consider two investors, investor A and B both have $10,000 Cdn$ in cash. Investor A buys $10,000 of BMO on the Toronto stock exchange and investor B converts his $10,000 (with no fee) to US$ and then buys BMO on the NYSE. After four weeks they sell their positions and investor B converts his US$ proceeds back to Cdn$ (with no fees). Which investor does better?
I’ll use data from Jan 1 for the buy. Stock prices are from yahoo financial and exchange rates are from Bank of Canada site.
On Jan 3, 2007 Investor A buys 144.3 shares of BMO.to at $69.29 Cdn$ and Investor B buys 144.5 shares of BMO (NYSE) at $59.60 US$.
On Nov 10, 2007 Investor A sells his shares at $60.22 Cdn$ to get $8691.00 Cdn$ and Investor B sells at $59.60 US$ to get $8636 Cdn$. The exchange rate is one Cdn$ = 0.9898 US$ (all values are at noon EST).
In my example investor B does slightly better however that is due to the fact that my stock prices are closing prices on Jan 3 whereas the exchange rate is at noon. The point is that the fact that the currency exchange rate had a huge swing this year did not affect the choice of buying the stock in either currency.
2) You can’t have US$ cash in a brokerage RRSP.
I’m really hoping this post gets outdated soon when all the brokerages start allowing US$ in their accounts but until then….
If you have US$ and you want to contribute to your RRSP then you will have to convert it to Cdn$ and pay an exchange fee. If you want to buy US$ securities with that money in the RRSP then you have to convert it to US$ once again (and pay another fee) to buy the stock. Unfortunately there is not much you can do about the currency exchange fees but in Ian’s case he should convert the US$ to Cdn$ and just buy the Canadian version of BMO in his RRSP.
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The RESP Book: The Simple Guide to Registered Education Savings Plans
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