I find it interesting that whenever there is a Stock report on television, or radio, the TSX or Toronto Stock Exchange is the only Canadian exchange mentioned.

I think I now know why.  I tried to talk to a Financial Planner a while ago, and made the mistake of mentioning the fact that I have investments that trade on the Canadian Venture Exchange.  The reaction I got was rather extreme.  “What kind of idiot are you??!!  Nobody is stupid enough to buy Venture Exchange Stocks!!  They are way too RISKY!”

I guess that is why we never hear about the Venture Exchange.  Why do I invest in companies on the Venture Exchange?  Simple.  It is a great place for a disciplined “Micro Investor” to actually make money.  Regular Investors can too, I’m just not sure why they seem to frown on the Venture Exchange.  The Venture Exchange is the home of a large percentage of start up, and small companies.  Yes those are more volatile types of companies.  Many of the companies listed on the Venture Exchange would be classed as “Penny Stocks” (I like Penny Stocks). I’ve read, that many of the worlds start up companies use the Venture Exchange for financing.     So, if the Venture Exchange is good enough for the rest of the world, then it is good enough for me.  In one of the Rich Dad books, he talks about taking the IPO of a start up mine to the Venture Exchange, not an American Exchange.  That is why I can’t seem to understand why the Canadian Press doesn’t pay more attention to the Venture Exchange.  Just so you know, we actually have several exchanges. The TSX (Toronto), The Venture (Vancouver), The Alpha Exchange (Banks and Insurance Companies), The Canadian Securities Exchange or CSE and the Montreal Exchange.

Not all of the exchanges have the same rules, especially when it comes to Financial Reporting.  Some exchanges don’t have as detailed accounting requirements as others. It is worth noting, that ALL public companies, both in Canada and the USA, must maintain certain accounting standards to be registered on ANY exchange.  They also have to make available, all accounting, and general business information, that could affect the stock price, to the public.  They do this through SEDAR for Canadian stocks and EDGAR for US companies.  I have found that the information on SEDAR/EDGAR is not significantly different for companies listed on different exchanges.  So I’m not sure “Accounting” practices are not really the issue why companies choose one exchange over another.  I think it is more the cost to the company of becoming listed, and staying listed.

I’ll explain why I, as a Micro Investor, like the Venture Exchange, and why I use it.  (WHEN STARTING OUT, DO NOT USE REAL MONEY ON ANY EXCHANGE FOR 6 MONTHS TO A YEAR.)  The key to making money as a Micro Investor is to find stocks that go up large percentages quickly, and are priced so that we can buy good sized quantities and are listed on reputable Exchanges.  The other factor important to a Micro Investor is the cost of the Trading Fees.  These issues have an important relationship.  I would list lack of experience, but that is not exchange or stock dependent.  That applies to every new investor.

The first reality every new investor faces is the TRADING FEES.  I have had many conversations with people about Trading Fees.  Trading Fees can be all over the map.  They are hugely different between Canada and the United States and differ from company to company.  I have found that most Canadian Banks, who offer online trading services, have roughly the same rates.  Many will give you a break on Fees if you have $50,000.00 plus in your trading account, or you do more than 30 trades a quarter.  The standard range today in most places, is $9.99 a trade.  Up until a few years back most Canadian Micro Investors were stuck with a $29.00 fee.

For the Micro Investor, the number of shares, you buy makes a very big difference.  Most exchanges have minimum quantities of shares they like to sell at a time.  Selling 2 shares is a hassle.  Selling 200 is easier.  These predefined quantities are called “Board Lots”.  The size of the Board Lots depend on the price of the share.  The price points are usually as follows:   For stocks selling at less than $0.10 per share, the LOT is 1000 shares.  Stocks selling for $0.10 to $1.00 per share, the LOT is 500 shares, and stocks selling for greater than $1.00 the LOT is 100 shares.  This is important, because if you trade in non Board Lots, there can be a PENALTY!  This penalty can be from 1 cent to as much as $1.00 PER SHARE!   The worst part is, that it is up to the “discretion” of the broker as to whether or not you get charged this penalty.  The penalties don’t get used as much as it used to, but the lesson is: Try to buy only in Board Lots.

When it comes time to sell, you may find it difficult to sell an “ODD LOT” even if there is no Penalty.  What often happens if you are trying to sell 512 shares is, the 500 will go, and you are left with 12 “Orphan Shares”.  Yes you still pay the full commission, even if not all the shares are sold. Selling orphan shares can be difficult and expensive.  Regardless of the number of shares traded, the same fee applies.  Selling 12 shares at $1.00 a share with a 9.99 Trade Fee is not a money making proposition. This has a big impact when buying shares with limited investment dollars.

For example:  As of writing, Telus T (TSX) sells at $31.62 a share.  Since the share price is over $1.00, the board lot is 100 shares.  So we would need to have $3.162.00 to get 100 shares. (You can buy less, but this is to show you the affect of “Board Lots”).   On the other hand, “Spot Coffee” SPP (Venture Exchange) today sells at $.12 a share.  It has a Board lot of 500.  So it would take only $60.00 to buy a board lot.  Notice the difference.  $3,162 for the TSX stock and $60.00 for the Venture Stock.  Also notice that $3,162.00 gets you only 100 shares, and $60.00 gets you 500 shares.  This is important to a Micro Investor.

The Fees make the quantity of shares purchased important.  If I bought the 100 Telus shares, the fee would be $0.10 per share ($9.99 divided by 100 shares).  That means that Telus would have to go up 10 cents a share just to break even.  But remember, there is another $9.99 fee when you sell, so Telus would have to go up 20 cents just to break even.  Compare that with Spot Coffee.  Here the cost per share is 2 cents ($9.99 divided by 500).  So, to cover the trade fees for buying and selling Spot Coffee, the price would only have to go up 4 cents.

It is always a good idea that we don’t put all of our eggs (dollars) in one basket.  We would like to be able to spread out our investments over a number of different companies.  If we only have $5.000 to invest, buying expensive stocks would mean that we have only 2 or three holdings.  The Venture Exchange, being home to smaller company’s stocks, allows me to have a variety of different stocks.  Even in different sectors.  So, the Venture exchange stocks allow us to increase the number of shares of one company, and the number of companies we can purchase.  It spreads our “Risk”, and decreases the Fee per share expense.

The other advantage/disadvantage is that Venture Exchange stocks can make big moves up or down in short periods of time.  Or in other words are, more volatile.  They have a tendency to go up and down fairly quickly.  TSX stocks will move as well but, generally not to the degree the Venture Exchange stocks will.  Again, lets use our two stocks as an example.  Over 52 weeks Telus (T) had a low of $29.52, and a high of $37.94.  That is a difference of $8.42 or a difference of 22%.  Over the same 52 weeks Spot Coffee (SPP) on the Venture Exchange moved between a low of $0.075, and a high of $0.22.  That is a difference of  $0.145 or 65%  If my target return on investment is 20%, then the Venture Exchange Spot Coffee stock will have more than enough swing to potentially make that 20% return or higher.  Telus doesn’t historically have the potential to do so.   As a Micro Investor the idea is to make 20 -30% on each stock at least once a year.

I can hear the Experts screaming already. “But big Telus is a safer investment than little Spot Coffee”!!!  And they are absolutely right!  But define “SAFE”.  Safe, when it comes to investing, usually means RISK.  The rule is, the SAFER the stock, the LOWER the return.  If you are looking for a Higher rate of return (15%-40%) you have no choice but to go to “RISKIER” stocks.  You just have to be a better investor.   So, if you’re 55 years old, and have $500,000.00 in your RRSP, and are depending on the income from the RRSP to pay your bills, Spot Coffee is not the right investment.  But if your 55 and have $5,000 in your RRSP and you want to retire in 10 years, a dozen “Spot Coffee” like stocks, just might be the right investment.  Remember “Ones size does NOT fit all”.

If you want to make an investment, and forget about it for the next 20 years, you should use the TSX Blue Chip Stocks or Mutual Funds.  If you take an interest in your money, are willing to put in the time and work to look after it, and really want to see it grow, then the Venture Exchange stocks might be worth looking at.  It can also be fun and exciting.  (stressful???)

Now the reality check.  Small company stocks, on any exchange, can go up fast, and also go down fast.  You should only invest in those kinds of stocks, after you know how to research a company, read and use a Stock Chart, and you have the ability to watch those stocks at least several times a trading day.  You also need to have, and follow religiously, your stop loss and exit strategies.  That is why you practice like it’s real for 6 months to a year, before actually using real money.  That will allow you to develop the right emotions (NONE), entrance and exit strategies (when to buy and sell), and learn how to use the research tools that are available to you, on your trading site, to know what to buy and when.  It also gives you time to learn from this site.

So, when you hear a stock report and they mention the TSX, just remember that Canada has another Exchange, called the Venture Exchange.  The rest of the world knows about it, so why don’t we?

Keep learning;

Uncle E