Sprott Global Resource Investments

Sprott's Thoughts

Henry Bonner

Use E-Trade or another Online Broker? Beware of “Pink Sheets” Market

Online discount broker E-Trade will no longer provide its “Global Trading” platform after July 9th.

If you have an account with E-Trade after July 9th, or any other brokerage account where you cannot trade on foreign exchanges, you will likely have to go through the “pink sheets” market to trade international stocks.

Discount brokerages tend to avoid international trading, which can incur higher trading fees, currency exchanges fees, and complying with additional rules and regulations.

Many international companies trade on stock exchanges like the Toronto Stock Exchange, the Australian Stock Exchange, or the London Stock Exchange.

At Sprott Global Resource Investments Ltd. (an affiliated FINRA Member broker/dealer), we trade directly in these markets, not through the “pink sheets” exchange.

What is the “pink sheets” market?

The “pink sheets” are an exchange, not a category of stocks. “Pink sheets” are an alternative way to trade foreign stocks, rather than buying and selling them directly on the foreign exchange where they are listed.

When you buy or sell a stock on the pink sheets, someone else is acting as an intermediary between you and the foreign exchange that hosts the company.

When stocks trade on the pink sheets, they trade under a different symbol. As a result, many investors believe that it is a different class of security, but you are still buying and selling the exact same stocks.

If you own a foreign-listed stock, you can sell your shares – or buy more – through the foreign exchange directly, or through the pink sheets. Either way, you will still be trading the same security.

Why invest directly through the foreign exchanges versus the pink sheets?

  • Liquidity

The number of participants trading on the pink sheets is typically much lower than the number on the ‘native’ exchange.

A low number of buyers and sellers on the pink sheets can lead to larger price moves on relatively low volume. Because few buyers are present, a relatively small sell order can cause the price to drop. Conversely, a small purchase order can cause the price to rise dramatically. Hence you stand to pay more when you buy, and receive less when you sell.

If you buy or sell off in small amounts to avoid affecting the market, you might spend days or weeks trying to sell or accumulate your position.

On the stock’s main exchange, you might have easily bought or sold your position within minutes with no noticeable effect on its price.

Let’s take an example. Kaminak Gold Corp. is a well-followed gold exploration stock, listed in Canada. On the Toronto Venture Exchange, the average volume is around 127,000 shares traded per day.1 At its current share price of around C$0.80 cents, this means that approximately US$80,800 worth of stock changes hands each day.

Unless you were buying or selling around US$80,000 or more of this stock in a day, you could likely complete your transaction without causing a major change in the share price.

Now, on the pink sheets market, Kaminak is listed as KMKGF, instead of its Canadian symbol KAM. Yet it is the exact same stock.

The average daily volume is around 24,000 shares. With a share price of US$0.64, this amounts to around US$15,360 per day on average.

This implies that liquidity on the Canadian exchange for Kaminak stock is 5 times greater than on the pink sheets.

Selling off a position of even a few thousand dollars could well have a severe impact on the stock price, meaning you would stand to earn much less from your sale.

  • Costs                                                                                    

The pink sheets market can come with additional costs, because someone else is acting as an intermediary between you and the native exchange where the stock is trading.

This intermediary must cover trading costs on the native exchange, as well as currency trading costs, and still earn enough from the transaction to make it worth their while.

That’s great for the intermediary – not so much for you.

Trading on the pink sheets can prove more costly than trading directly on the foreign exchanges and in some cases that difference can be meaningful.

So trading stocks on the pink sheets can add both expense and risk to investing.

How can you avoid the pink sheets?

To access foreign exchanges, including the Toronto Stock Exchange, the London Stock Exchange, and the Australian Stock Exchange, your broker must allow trading directly on foreign exchanges.

Sprott Global Resource Investments Ltd. offers the possibility to trade on nearly all foreign exchanges directly.

This allows you to avoid mark-ups from intermediaries, and benefit from higher volumes, which can allow you to obtain a better price when buying or selling.

Are there tax consequences for transferring my portfolio to another brokerage firm?

You can transfer your entire portfolio from one brokerage firm to another without selling any of your stocks. Hence there are no tax consequences.

If you own stocks inside an IRA account, you can transfer those stocks to a new IRA account without any tax consequences or even having to report it as a rollover.  The process is very simple and usually only takes several business days.

How to get started?

Our team can answer any questions you might have about trading on the pink sheets versus trading on foreign exchanges directly.

We can walk you through the process of opening an account with Sprott Global where you can begin trading directly on the foreign exchanges if you are attracted to this option.

Simply send me an e-mail at hbonner@sprottglobal.com with the subject line “Pink Sheets,” or dial 800-477-7853, and our team will take it from there.

On July 9th, E-Trade will cease to provide its “Global Trading” platform.

And if you have an account with any other online broker, odds are that they offer only pink sheets for trading foreign stocks.

Many brokerage firms will restrict their clients to only trading on the pink sheets because they do not do enough business with foreign stocks to make it worth their while. 

Sprott Global continues to trade foreign stocks because the resource sector is truly global.

Trading directly on the foreign exchanges remains in your best interest if you plan to own foreign stocks.

Get in touch with us today to start bypassing the pink sheets and trading directly on the foreign exchanges.

Call our office at 800-477-7853.

Or e-mail hbonner@sprottglobal.com.

Note: Trading in low priced stocks may subject you to higher volatility and risk.  You could lose your investment.  Trading and processing fees may be higher with foreign stocks.

1 Bloomberg

Disclosures

This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested.

Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment.  Because of significant volatility,  large dealer spreads and very limited market liquidity, typically you will  not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.

Sprott Global Resource Investments Ltd.

Member SIPC/FINRA

 

 

This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested.

Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and nowadays also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment.  Because of significant volatility,  large dealer spreads and very limited market liquidity, typically you will  not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally  associated with  domestic markets, such as political,  currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.

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