Special Report: Trading Canadian Microcaps

Why Go Canadian?

To anybody familiar with microcap or “penny stock” trading, the Toronto Venture Exchange — or TSX-V — is something of a promised land.

Known to professional, risk-insensitive investors as the home of the TSX-50 — a list of the 50 most promising small companies across sectors ranging from oil and gas to technology and life sciences — this exchange hosts some of the smallest and most volatile but also the most prospective stocks available for trade anywhere in the Western world.

tsx venture 50

Unlike the American OTC market equivalents of many of these stocks, the TSX-V listings are often far more liquid and far easier to buy and sell.

Take Hudson Resources, for example — a Vancouver-based mining company specializing in rare-earth metals exploration and mining.

The stock trades under two ticker symbols: HUD.V on the TSX-V and HUDRF the OTC market.

On the American exchange, the volume for the last three months has averaged just over 2,000 shares per day.

On the Canadian exchange, it's averaged just under 20,000.

And yes, this is a very big deal if you're a trader.

Just imagine a stock exchange as a marketplace where people buy and sell fruit. Would you rather go and get your apples at a market where there is one vendor selling just a handful of apples or many vendors selling many apples?

Nothing beats a liquid marketplace. It means that things move fast - transactions are made more readily, with deals being struck based on far smaller fluctuations in share price.

It's a trader's nightmare to have to chase buys or sells in a sleepy market.

And because venture-level companies garner more attention on the TSX-V than they might on the US OTC Markets, it's not uncommon to see technology companies – including biotech and clean energy firms taking advantage of the risk-seeking TSX traders.

However, for many companies — especially mining exploration companies specializing in precious metals, oil, and gas — the TSX is an exclusive home.

Until, that is, buyouts or mergers boost them into the ranks of far bigger, more institutionalized exchanges like the NYSE.

The bottom line: If you want a small, development- or start-up-stage company to invest in — especially in the mining, oil, gas, and biotech sectors — the TSX will offer the best volume and therefore the best profit margins for trading.

But of course, there's always a hitch...

For American investors, buying TSX-V stocks isn't as easy as logging into your Scottrade account and clicking “trade.”

Using the most popular online brokerage sites like Scottrade or E-Trade will typically only give you access to the TSX's less-liquid American equivalents.

So professional investors need to find ways around this limitation.

Hired Guns or Stream of Electrons?

The most obvious way to go is to get a live broker.

Live brokers are expensive, as they charge commission rates between 1% and 2% of the trade (welcome to the world of finance). But there is a benefit to having one of these guys on your side.

First of all, they will move shares faster than your electronic brokerage will. There's no real trick to it; they just know how to nail blocks of orders more efficiently than you will using your basic setup.

They're more experienced. They can spot trends and air pockets. They recognize the names on the buy and sell orders and make deductions on what the stock is doing, why, and where it might be going.

This is what you get when you have a financial pro who is a member of a relatively small community working for you.

However, like I said, this comes with a price: Every trade you make needs to gain at least 1% to 2%, or you'll lose money on brokers' fees.

So what does one do? Well, right now, there is an electronic alternative that offers TSX-V-listed stocks for trade for a fee of about $16.

It's called Penntrade.com, and it does the trick — giving you all the access you need to these more viscous securities but without the costs of a live broker on the phone.


You might be less informed when making your trades, but it does grant you the flexibility of 24-hour computer-based transactions, which so many prefer today.

In the end, the decision of whether to even get into TSX-V-listed stocks is the one that will guide your thought process.

Some people stay away from them altogether and just stick to what they can get using their standard online brokerage systems to buy American OTC shares of whatever microcap companies they want to own.

I've done it, and I've felt the sting of having to chase buyers or sellers.

If you're an active trader that can't stay away from the upside potential of microcap stocks, consider getting into the Canadian markets today.

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