Trading Options And Foreign Stocks: When Low Trading Volume Is Not Illiquid

In the above example, I am willing to sell a few hundred shares of CWEN/A at $20.90, so $0.90 is the option premium I am asking in my limit order.

Foreign stocks

In many cases, trading foreign stocks on the US markets is similar to trading options. For this example, we will use Valeo SA (FR.PAVLEEFVLEEY.) Note that Valeo has three ticker symbols.  FR.PA means that the company’s primary listing is in Paris (the .PA part) and it trades with the ticker “FR. ”An alternative convention for denoting the same thing would be “Paris:FR.” Similarly, CWEN/A above could also be written NYSE:CWEN/A since the stock trades on the New York Stock Exchange. I usually omit the “NYSE:”, “NASD:” and “OTC:” from US listings, since you do not need this information to trade the stock.

In addition to their home markets, foreign stocks may trade in the US as an American Depository Receipt, or ADR.ADR’s can be listed on US exchanges (for example, Mix Telematics (NYSE:MIXT) or just MIXT). More often, they trade on the over the counter market, in which case they have a five character ticker ending in “Y” like VLEEY. ADRs are created by banks which purchase shares of the underlying stock on the foreign market, and then sell ADRs representing some number of those shares to US investors. VLEEY represents half a share of FR.PA, while MIXT represents 25 ordinary shares of Johannesburg:MIX or MIX.SJ on the South African Johannesburg Stock Exchange.

The sponsoring banks charge a small fee for creating ADRs which is deducted from stock dividends when they are paid.

Some brokers also allow clients to directly purchase foreign stocks using a five letter ticker ending in “F” such as VLEEF. In this case, the broker either directly trades on the foreign exchange on behalf of the client, or does so through an affiliate. Trading commissions are typically much higher for trades of the foreign stock (VLEEF) than they are for the ADR VLEEY, but trading the foreign stock directly may be more cost effective for larger trades when the investor plans to hold the stock for a long time because trading VLEEF avoids the ADR fee. Investors may also ask that shares of the ADR be converted to foreign shares for a one-time fee.

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Disclosure: Long CWEN/A, MIXT, VLEEF.

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