Buying shares on low volume exchanges

Prezatch

Next year I was thinking of buying some shares in a few large cap US stocks (well known names) which are also available in EUR on exchanges such as Amsterdam, Frankfurt etc. as I would prefer not to worry about FX.

Are there any risks involved in buying on these exchanges which have much lower volumes traded than say the NASDAQ?

Risks - might not get the trade when you want it, best price might not be available, will have to sell in same exchenge, possibly local withholding taxes on dividends.

I wouldnt worry too much about FX. Even though the companies are US based, the shares will anyway move in EUR in line with the fate of the dollar. Make sure your broker allows you a US dollar cash account so that once you have bought US shares you can continue to buy and sell in USD without further FX charges. This might be less relevant if your investment objective is to get dividends for EUR expenses rather than for reinvesting in USD.

Prezatch

I'm worried however about the fact that the EUR/USD rate is at historical low around 1.12.

For example:

Buy today 100 shares @ $50 = 5000 USD. Cost of this in EUR today is 4,464 (1.12 rate)

Sell in 3 years 100 shares @ $80 = 8000 USD. Receipt of this in EUR is 6,154 (assuming the FX rate goes to 1.3 again)

So that's 1,690 of profit..... whereas if the whole transaction was in EUR it could have been 3,000 of profit (8k - 5k)

https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=Linear&chdeh=0&chfdeh=0&chdet=1444118915432&chddm=2358748&q=CURRENCY:EURUSD&ntsp=0&ei=foETVsuFIMXcsAGPn6CADg

Is there something I'm missing?

JoeyD

JoeyD wrote: »

Is there something I'm missing?

I think so. The price is always be priced in dollars and converted by the exchanges to euros at the time of quoting.

Thus to buy 100 shares today (using your example) on a european exchange would still cost you 4464 eur and to sell it in 3 years would get you 6454 eur.

One thing to consider would be to buy a European company in the sector that you are interested in, rather than a US one... eg to buy Total or Shell instead of Exxon.

However this is not as simple as it sounds as currency movements can influence multinational companies profits (or movements in various currencies can cancel out). Also buying on some european exchanges can expose you to withholding taxes on dividends.

Prezatch

Ok I've looked at this again. Taking my example when the exchange rate is 1.12 at buy time (like now) and 1.3 at sell time (a historical average)

On Frankfurt exchange

Buy 100 @ €44.64 ($50/1.12) = €4,464 Total
Sell 100 @ €61.54 ($80/1.3) = €6,154 Total

Profit €1,689


On Nasdaq exchange

Buy 100 @ $50 = $5,000 Total
Sell 100 @ $80 = $8,000 Total

Profit $3,000

Profit converted to EUR at sale date €2,307 ($3000/1.3)


So going by this calculation, it is better to buy US shares on the NASDAQ as opposed to a EUR exchange if you are predicting the EURO to strengthen against USD in the next few years.

Anyone else see anything wrong with this calculation?

robp

JoeyD wrote: »

Ok I've looked at this again. Taking my example when the exchange rate is 1.12 at buy time (like now) and 1.3 at sell time (a historical average)

On Frankfurt exchange

Buy 100 @ €44.64 ($50/1.12) = €4,464 Total
Sell 100 @ €61.54 ($80/1.3) = €6,154 Total

Profit €1,689


On Nasdaq exchange

Buy 100 @ $50 = $5,000 Total
Sell 100 @ $80 = $8,000 Total

Profit $3,000

Profit converted to EUR at sale date €2,307 ($3000/1.3)


So going by this calculation, it is better to buy US shares on the NASDAQ as opposed to a EUR exchange if you are predicting the EURO to strengthen against USD in the next few years.

Anyone else see anything wrong with this calculation?

If the Euro strengthens your investment in dollars will be worth less Euros with a weak Euro. What is best just depends on where you spend you money though. I think having a stock in its home currency gives a little more freedom but its not a major advantage.

JackieChan

JoeyD wrote: »

Ok I've looked at this again. Taking my example when the exchange rate is 1.12 at buy time (like now) and 1.3 at sell time (a historical average)

On Frankfurt exchange

Buy 100 @ €44.64 ($50/1.12) = €4,464 Total
Sell 100 @ €61.54 ($80/1.3) = €6,154 Total

Profit €1,689


On Nasdaq exchange

Buy 100 @ $50 = $5,000 Total Going to cost the same 4,464 as above
Sell 100 @ $80 = $8,000 Total Worth the same 6154 as above

Profit $3,000

Profit converted to EUR at sale date €2,307 ($3000/1.3)


So going by this calculation, it is better to buy US shares on the NASDAQ as opposed to a EUR exchange if you are predicting the EURO to strengthen against USD in the next few years.

Anyone else see anything wrong with this calculation?

The problem with your calculation is that you are ignoring the fact that you had to convert euros to dollars for your nasdaq purchases. The 5k dollars would have cost you €4,464(using your rate).
If you subtract this from your euro converted sale price(€6,154) you end up with the same profit figure.