Rounding it up
There aren’t really any stocks that Canadians cannot purchase but there are limits to how and when they can do so.
Canadians cannot buy into American IPOs but can participate in American stock trading using Canadian companies.
There are a number of different schemes that are illegal but can be difficult to spot, so investors should be wary.
Investing can be confusing. Buy and sell orders, short selling, market deviations, APR, ARM, CD, ETF, EFT, and all of the other acronyms that make no sense at all — how is the common mortal supposed to understand any of it? Whether you’re just getting started on your investment journey or you’re a seasoned veteran, it can be just as much of an adventure trying to sort through the disclosures as it is to select a stock to buy.
Worse still, how are you supposed to tell between the types of stocks you can buy and those that you can’t. Canadians have quite a bit of freedom with investments and are able to take part in many different kinds of purchases and sales. There are, however, a few things that run afoul of the law in Canada. We’ll run through the types of stocks that Canadians cannot buy and a few of the other areas where you’ll want to tread carefully.
Any no-go stocks?
No, not really! There really aren’t any stocks that Canadians can’t buy. You’re more than welcome to purchase nearly any kind of stock, from Exchange Traded Funds (ETFs) to individual pieces of companies. Do you want to own some stock in a public mining company that is headquartered in your town? Go for it. Get a broker or download a trading app and buy! That! Stock! Plus, the Canadian Securities Administrators have a wealth of information about getting started, including with whom you should do business and how you can go about actually buying stocks. Remember that the purchase and sale of investments, regardless of type or size, will have tax implications.
There are a few things, though, that are a bit of a no-go. These can be broken into two main categories: stocks or stock platforms that you can’t access and those that are illegal.
Things you can’t buy
Yeah, I know. Disappointing. IPOs are an extremely fun thing to be a part of. As the markets continue to recover from the COVID-19 pandemic, individuals and companies have started to reinvest in equipment and personnel. This has directly resulted in an increased need for capital. As a result, Canadian IPOs are booming in the last few months as everything from pizza subscription services to mineral extraction companies go public.
Unfortunately, despite all the stories of investors who got rich when they invested in Facebook’s IPO, these opportunities don’t really come up for the commoner. That’s because IPOs are incredibly expensive and require massive amounts of capital and effort to bring about. As a result, the shares of the newly IPO'd company are incredibly valuable and are often “pre-purchased” as a part of the deal of bringing the company public in the first place. These pre-IPO shares often go to large financial institutions, large pension funds, and wealthy investors.
Moreover, Canadians are not allowed to participate in American IPOs directly. They can take a position in an ETF that may take part in IPOs of companies but the individual investor doesn’t necessarily direct that activity.
The downright illegal
There are a few things that are against the law when it comes to buying stocks, and they can be more difficult to spot than you may think. As a layman trying to invest for retirement or just for a bit of extra dough, it can be extremely difficult to understand where some of the ethical and legal lines lie.
Let’s say you work for ABC Design company as an engineer. You’re developing your new widget that will help other widgets work well together. It’s going to be a key part of your new Widget Wonder Wheel product that is a huge seller. This is big. You own some stock in ABC Design as an employee, which is fairly common, that came along as part of your compensation package. You’ve bought and sold a bit of it over the years but generally have held onto it.
While you’re working on your part of the widget, you overhear the boss talking about how one of the other widgets that go into the Widget Wonder Wheel is faulty and won’t be ready in time for the planned Christmas time launch. This will be a huge hit to the company’s bottom line. Yikes. You, realizing that you own a chunk of the company and stand to lose some serious cash, sell your entire position. You, my not-so-savvy investing friend, have just committed insider trading.
Insider trading occurs when an individual takes action on a stock with knowledge that is not available to the general public. This is a legal area that can get very complicated very quickly, but in essence, if you know something about a company, either good or bad, that others don’t, you can’t trade on that information. This is separate from the point below because it can be difficult to spot, even in your own portfolio.
Fraud & market manipulation
Probably goes without saying, but you can’t do illegal things to make money. Shocking, I know, but it must be said. These generally fall under the general umbrella of market manipulation. One of the most common examples of market manipulation is a pump and dump scheme. Here, a group or individual will buy up a very inexpensive stock, often for just pennies, and then aggressively push people to buy the stock as well. These pushes often take the shape of pressuring retirees, the elderly, and other vulnerable populations to buy into the stock, promising quick returns. As a result of the purchases, the stock price rises quickly and when it gets to a certain point, the individual running the scheme sells their share, taking the profits and leaving the others out to dry.
Another extremely common tactic is called washing, where investors will quickly and repeatedly buy and sell the same stocks to increase activity, thereby increasing other buy orders. These kinds of schemes happen all the time and it can be easy to get involved in one without realizing it.
What about American stocks?
Not interested in Canadian companies or exchanges? Our neighbors to the south have a very lucrative market that is more than worth getting involved in, and it’s no problem to do so. Ensure that the broker or app you’ve selected has access to US capital markets and trade away. Note the fees, though. You may find that there is a higher brokerage fee for trading internationally and there will also likely be a currency transfer fee. ETFs are also a great way to dip your toe in American investment waters. So, if you’re interested in investing in American stocks, it’s possible.
It is possible to get around some of these fees, as well. Many of the larger Canadian brokerages offer the ability to link your Canadian account to a US-based bank account. When you deposit Canadian dollars, they’re automatically converted to US dollars, with a fee. However, they’re now sitting in America in US dollars; this allows you to trade as if you were sitting in Manhattan. The other method is called Norbert’s Gambit, which is a very silly name for an extremely useful tool. In essence, you’ll buy an ETF that has both Canadian and US shares. Then, you’ll ask your financial institution to “journal over” those shares to their American counterparts. Your broker will likely charge a fee for this service, so be sure you understand the potential damage before hitting send.
In both cases, you’ll still have Canadian tax implications and, in some instances, may have US tax implications as well. Be sure to review all of the documentation that comes along with your accounts so you know what you’re getting into.
As it happens, there aren’t too many stocks that Canadians can’t buy. The methods you use to purchase them and the tax implications for doing so, however, may make buying and selling them a bit of a bear to manage. As a refresher, Canadians are not able to participate in American IPOs and will have a hard time getting into the Canadian versions as well. They also aren’t able to use certain stock trading apps to access capital markets. Additionally, there are a number of illegal schemes that anyone trading stocks should keep an eye out for, especially since they can be difficult to spot. As always, make sure you have a firm understanding of the fees involved with trading and have a sound budget that allows you to dedicate a certain amount of funds to investment opportunities.
Dan is a runner and writer living in the Washington, D.C. area, where he currently works for a financial services trade association as the Communications Director.