Category Archives: Learners’ Series

Saving Money with Limit Orders

If you buy individual stocks for your portfolio, you might be familiar with limit orders. If you aren’t familiar with limit orders, you should be, as they are a great tool to ensure that you don’t pay too much, and can also be used to save money.

That majority of retail investors probably use either market orders or limit orders when they buy individual stocks. Market orders are simply orders to buy* at the best available price (which is usually the currently listed price). Problems can arise, however, if the price of the stock rises between when you hit “buy” and when the order is actually filled.

By using limit orders, you state the highest price that you are willing to pay for the security (ie. you set a limit on what you will spend). This means that if the price of the stock moves up you will not be hit with a higher than anticipated purchase price. You have given instructions that clearly state that you won’t pay more than a certain price.

I have seen recommendations to set the limit order price at the current market price, or slightly above the market price (say one or two cents) to ensure that you get your shares without paying too much. This is solid advice if you are happy with the current market price, and absolutely must have those shares. Personally, I usually use limit orders to wait for a better price.

Ninety-eight percent of the time I set my limit order to below the current market price and wait out the day to see if my order is filled. This system started because I dislike paying commission, and wanted to lower my purchase price in order to cover the cost. If, for example,  I must pay $9.95 in commission and want to buy 100 shares, I would place a limit order to ten cents below the market price. If the order goes through, I would have saved $10 on the stock purchase, which would equal out the commission cost.

Gradually, however, I started lowering my limit order to reflect what I was hoping to pay.

I recently bought 300 shares of a company I like and set my limit price to 25 cents below what the stock was trading. The stock dropped later in the day and my order was placed, saving me about $65 ($75 saving minus $9.95 commission) compared to if I had merely bought at the market price earlier in the day.

Using limit orders in this way means that you sometimes need to be patient. About a year ago it took me five trading days to buy the shares of a great company. The stock never fell to my offer price over the first four days. I got lucky on the fifth day, however, as the stock dropped significantly before I had placed my limit order. Because of that, I was able to buy into that business at an even lower price than I had been prepared to pay. Thank you Mr. Market!

Unfortunately, the down side to this method is that potential upside may be missed. Another wonderful business that I wanted to own was already very cheap in December 2009. I placed my limit order to cover the commission cost, but the stock went up… and up. I placed my limit orders diligently, but finally decided to abandon the idea as it continued to climb in January, and bought close to the market price. I missed out on about a week of upside, but have enjoyed the ride since. This is a situation where I should have bought at the market price in the beginning. Not because of hindsight, but because I already knew it was cheap, and I really liked the business. I let my emotion of “commission avoidance” get in the way.

So there are some pros and cons to making a limit order below market price, but I generally feel that the pros outweigh the cons. Regardless if you set your limit price at, above or below the market price, at least you know what you are paying.

*Limit orders can be used either to buy or to sell, but the examples in this post only consider buying a security.

Interview With a Canadian Trade Commissioner: Part IV

(At the end of September, I was fortunate to be granted an informal interview with one of the Canadian Trade Commissioners abroad. This is the last in a four-part series of articles based on that talk.)

One of the most interesting parts of out talk was learning about the various areas where the International Trade Office helps Canada. To be honest, before meeting with the Trade Commissioner, I thought their main role was helping to bring smoked salmon and Blackberries abroad (only half-joking). In fact, there are 5 main areas that the combined Departments of Foreign Affairs and International Trade operates. The last two categories, unfortunately, we didn’t get into great detail about.

Environment, Bioengineering, and Energy

As mentioned in part III, there are several foreign companies investing in the energy sector in Canada. This ranges from solar and wind farms to the oil sands.

The environment and sustainable energy is a focus, however, and the Department of International Trade is involved with endeavours like Globe Vancouver, a trade show and conference (dubbed “the Davos of Sustainability”) dealing with the link between business and the environment.

Agriculture and Food

Because it is less noticeable than a shiny Blackberry or a towering wind turbine, agri-food is sometimes forgotten, but it is a major component of international trade.

Regulation is important, and the exchange rate is a large variable. Because of the strong yen recently, Japan has increased its purchases of Canadian commodities like grain and canola oil.

Other large players in this category are seafood, meats, maple syrup, ice wine, and though some readers may not like to know this, horse meat to Japan, where it is a delicacy. (Don’t knock it till you try it!)

High Tech, ICT, and Medical

Information and communications technology (ICT) is a large component of the trade between Canada and other countries, and RIM is only a small part of the pie.

Within ICT, Canada and Japan have worked together on Intelligent Transportation Systems (ITS). This is technology using Middleware to link smart cars and smart roads. These systems are being designed to help with fuel efficiency, and can reduce traffic accidents and congestion.

Companies like Bombardier, Bell Helicopter, and Toyota also fit into this category, as the aerospace and automotive industries are large links between Canada and Japan. The cities of Hiroshima and Montreal, for example, are trying to deepen bilateral ties.

Building and Consumer Products

Canada is considered and advanced housing materials provider, exporting both unprocessed and cut lumber, insulation, flooring, and pre-fabricated components such as cabinets, doors and kitchens.

General Economy and Culture

All the other odds and ends of trade, as well as the areas that fall under the jurisdiction of the Department of Foreign Affairs.

Through these 5 categories the Department of International Trade plays a major role in connecting Canadian businesses to the world.

Closing Thoughts

Unlike visiting the Canadian Embassy (which is like a fortress to gain access to) I found the Office of the International Trade Commissioner to be very open, and inviting. When I first walked into the reception area of the office, they were surprised (I hadn’t called in advance), but extremely friendly and excited about the idea of this article series. After a brief description of what I proposed to do, the Trade Commissioner quickly opened his schedule and we came up with some possible times to have our discussion. He emailed me personally that night with some requests to avoid red-tape (If I were to use his name or give the specific location of his office, this process would have had to go through official channels). We met a few days later.

My talk with the Trade Commissioner was a lively and informative talk. It moved through many topics and geographic locations. He is young, energetic, and has a genuine desire to have Canadian businesses succeed in Japan.

I would encourage anyone interested in International Trade to contact their local Trade Office to see if an informal chat could be set up. From my experience, they are more than willing to help educate at the grass-roots level.

Interview with a Canadian Trade Commissioner: Part III

(At the end of September, I was fortunate to be granted an informal interview with one of the Canadian Trade Commissioners abroad. This is Part III in a series of articles based on that talk. )

My last post dealt with Canadian export to foreign countries, but the Department of International Trade is also very much involved with Foreign investment in Canada. In the case of Japanese investment in Canada, a good and widely known example can be found in the Toyota plant in Cambridge Ontario.

Here we have the reverse of the trade route. Toyota executives made contact through a Trade Office located in Japan. The Trade Office then contacted officials in Canada as well as at many Regional Offices in Canada. Eventually an agreement was made to create Toyota’s first plant in Canada.

The inflow to the Canadian economy didn’t stop with the creation of the plant. In order to have the factory (which produces the Lexus brand) run smoothly, several executives from the Kyushu plant in Japan were relocated to Southern Ontario. The Kyushu plant produces Harriers, which is a high-end model of car. These executives and engineers moved to Ontario to provide expertise and guidance.

Considering everything, there are actually several layers of investment and participation in the Canadian economy with such a venture. Construction companies were contracted to build the plant, workers hired, materials and resources purchased, parts manufacturers contracted, and taxes paid. There is also another effect, albeit small, which is the result of all the Japanese executives and their families moving to Ontario; these 50 or so families need to rent homes, buy food and other products, and pay taxes.

Another situation of Japanese companies investing in Canada has been in the renewable energy sector. Over the past several years, Japanese companies have been investing in the Canadian solar industry, either through investment in Canadian companies, or by setting up their own solar farms and stations.

A recent rule on wind power in Ontario has caused a trade row between Japan and Canada, as the Japanese companies say that the support for wind power creates a trade barrier for them, and is especially painful because the ruling came after their large investment in the province.

The dispute is unresolved as of yet.

The next article in this series will talk about the five specific areas that the Trade Office deals with, as well as some examples within each sector. They very much overlap with my last post and this, and will hopefully give some further clarification into how deeply intertwined countries and countries are. Toyotas and Blackberries are only the suface.

Interview With a Canadian Trade Commissioner: Part II

(At the end of September, I was fortunate to be granted an informal interview with one of the Canadian Trade Commissioners abroad. This is Part II in a series of articles based on that talk. )

There are several ways in which the Department of International Trade can help Canadian companies and the Canadian economy. While Japanese export to Canada is not a focus, the Trade Office does deal with it a lot because of Japanese companies coming to them for that reason. Their main mandates, however, fall under the goals of Canadian export to Japan, and Japanese investment in Canada (or the country of said Trade Office).

In the case of a Canadian company wanting to sell its product or service abroad, they would first go to their regional trade office. While we did not get into the specific details, we did talk in general terms, and Research in Motion came up, so let’s use them as an example.

Research in Motion would go to a regional Trade Office (say in the Kitchener-Waterloo area) and state their desire to sell Blackberries in Japan. They would register with the Trade Office to gain access to the database of market research. The regional office would contact the office in Japan and pass on any important information to them. From that point onward, RIM would be in direct contact with the Trade Office in Japan.

The Trade Office would then introduce RIM to the big cell phone players in Japan, and it would then be up to RIM to decide which provider is best suited for their needs. As Blackberries are only available on the DoCoMo network, we can guess what their decision was.

Another route for Canadian companies to gain access to a foreign market is through trade fairs. This may be as simple as setting up a booth at a foreign fair (think Bombardier sending planes and staff to the Dubai Air Show to gain orders) or in the case of at lease one Canadian company, being more proactive and setting up something yourself.

Clearwater Seafood of Canada, for example, was very proactive in Japan. In July of this year they sponsored the “Homard Festa,” in which they teamed up with about 80 restaurants in Fukuoka Prefecture, to highlight Atlantic seafood for the entire month.

The Trade Commissioner and I didn’t talk about the results of this endeavour (as it was only a couple of months ago, so not enough data is in) but my assumption would be that if a restaurant experienced consumer satisfaction resulting from the Atlantic seafood, they may add it to their permanent menu, in which case they would continually import from Clearwater.

In both of the above examples, we have situations where Canadian companies have made efforts to sell their products abroad. Of course, it is not always that direction. Sometimes foreign companies want to invest in the Canadian economy.

And we will deal with that in the next post: specifically, Japanese companies wishing to invest in Canada’s infrastructure.

Interview With a Canadian Trade Commissioner: Part I

(At the end of September, I was fortunate to be granted an informal interview with one of the Canadian Trade Commissioners abroad. This is Part I in a series of articles based on that talk. )

Walking into the office of the Canadian Trade Commissioner, I am met with memories of home: maps of Canada and the individual provinces line the walls, a small Canadian flag sits on the cabinet by the entrance, about 20 bottles of Canadian wine and maple syrup are on display, and the assistant to the Trade Commissioner (who doubles as receptionist) ends her sentences with eh.

I’m thrown for a little bit of a loop, however, as I quickly realize that all three of the people who staff the small office (The Commissioner of International Trade, The Commissioner of Foreign Affairs, and their assistant) are Japanese citizens. Through my talk with the Trade Commissioner, however (whose Blackberry sat on the table throughout our interview) I found out that there are two types of employees working at Canadian offices abroad.

The Canadian Basis Staff (CBS) are Canadian citizens and are brought over from Canada. CBS make up the various Ambassadors and Diplomats that act on behalf of Canada abroad.  Locally Engaged Staff (LES) also represent Canada, but are hired by the Canadian government in the foreign country.

What I found interesting from this is that while LES are mostly citizens of the foreign country in question, anyone could become a LES. A Canadian citizen in China, for example, could be hired as a LES if he or she spoke Chinese at a native level. In practice, however, LES are almost always citizens of the host country, as not only language ability, but also a deep understanding of the local culture is very important when dealing with international trade.

The Trade Office works under the Canadian government and Embassy as “The Department of Foreign Affairs and International Trade,” which is a merger of the two departments. The International Trade department is further broken down into two components: Regional Offices located in Canada, and Foreign Located Offices located abroad; the two offices work closely together.

The main function of the International Trade Department is to give assistance to Canadian companies in establishing links abroad. A company wanting to sell its product or service abroad would first go to the regional office in Canada. After determining certain criteria, the regional office contacts the foreign located office, which then offers further and more specific advice to the company.

During this process, the company would register with the Trade Office to gain access to a government database of local market data where they could research market reports, gain more understanding of a region’s area and market timing, as well as see lists of trade shows in the area.

The government and Trade Office provide this service free of charge. They can help regarding advice on local logistics or to introduce interpreters, but they do not act as mediators or agents, and are not involved with any ensuing negotiation. Most importantly, they can introduce Canadian business people to Japanese counterparts through Embassy sponsored events. It is these introductions and networking opportunities that are the seeds of international trade.

Part II of this series will deal with some of the company to company, as well as country to country, connections that can occur.

The Carry Trade and Exchange Rates

So now we have an understanding of the carry trade, and a primer on supply and demand. But why does it affect exchange rates?

Simply put, exchange rates are also subject to supply and demand.

If you decide to exchange a few hundred Canadian dollars into Euros for your trip to France, you are essentially selling dollars and buying Euros. Alone it is nothing that would change the economy. But what if millions of people were doing that simultaneously?

It would mean that there would be upward pressure on the Euro, as many people want Euros (much like the Furby in the last post). The desire to own Furbies or Euos would cause the price to increase. At the same time, all those people selling Canadian dollars would cause its value to decrease.

Going back to our Japanese carry trade example from a few days ago, when interest rates in other countries were quite high compared to interest rates in Japan, many retail and institutional investors were sending money abroad: ie. they were selling yen and buying other currencies. The act of doing so meant that the Japanese yen remained low or went lower.

But then the world credit crisis and recession began and there were a few things that came into play in a very short time span.

  1. Japanese investors became fearful: Seeing the global problems many Japanese investors decided to get their money back to Japan as quickly as possible, so they sold their foreign investments and exchanged the money back into yen. This had the effect of strengthening the yen, as it was a sought after currency.
  2. Foreign stock prices fell: We all know the carnage that happened to global stock prices in late 2008 and early 2009. Many Japanese investors involved in the carry trade who had stock holdings sold their shares and repatriated their yen in order to avoid further losses. All this money coming back to Japan further strengthened the yen.
  3. Global interest rates began to drop: Investors who left their foreign investments in place began to question their decision as other governments lowered interest rates. If a Japanese investor had taken out a 1% loan to invest in a Canadian bank account that was now only making 0.25% interest instead of 4%, the investor was losing money. Many investors emptied their foreign bank accounts and brought money back to the “safety” of Japan. Again, increasing the value of the yen as so many people were selling other currencies and buying yen.
  4. Fear on Fear: Through it all, the yen was moving up in relation to many other currencies. A large portion of the movement was due to fear of further losses, or fear of a higher yen. As the yen kept moving up and up, many stragglers were forced to exchange their money back into yen for fear that the yen would go higher, and they would lose even more… ironically, in doing so they would have added to the demand for the yen.

And that brings us to today. Though the yen has come down some, it is still high because there are not many investors willing to take a chance on the global recovery yet. Once North America and Europe raise interest rates to more profitable levels, I think we will see the Japanese retail investor sending money abroad again, which should lower the yen’s value.

Though it’s taken me three posts, hopefully I’ve been able to answer the original question of what the carry trade is and why it moves the yen.

Supply and Demand

My last post dealt with what the “Carry Trade” is actually all about. We want to understand why it can move currencies, but before we can do that, I realized that we need to have a basic understanding of supply and demand.

If you are unfamiliar with supply and demand, the basic premises that we need to remember are:

  1. As demand rises beyond supply, so will price.
  2. As demand falls below supply, so will price.

The easiest way to understand this is to remember the foolishness that surrounded such products as Buzz Lightyear, Furby and Cabbage Patch dolls. They each had a price attached to them when they came on the market, but they became insanely popular. So people bid up the prices in order to get their hands on one.

Someone I know paid somewhere around $100 for a Furby for her daughter.

After the Christmas season, however, manufacturers were able to bring a larger supply to the market, which also coincided with a decrease in demand (no Christmas rush) and prices moved back to rationality. Someone who bought a Furby for $50 on December 10th may have been able to sell it for $100 on December 20th, but  he/she would not have been able to get that price in February.

Think also of tickets for the mens hockey gold medal match at the recent Vancouver Olympics. Tickets were issued with prices of $350 – $775 depending on the seats. Here is a slightly different situation, in that there was a specifically limited supply. You couldn’t run around to different stores or hope that the manufacturer would be able to get out an extra shipment – there are only so many seats in the arena.  As Canada and the U.S. progressed in the tournament, demand moved higher and higher to the point that $775 face value tickets could be had for prices of $5000, $10,000 or even $15,000!!!

The limited amount of seats in the venue as well as the success of Canada and the U.S. meant that prices could move this high. With a normal product if price moves too high, demand will fall off in light of more rational thinking. If there are only 13,000 seats available (about 19,000 seats are in the arena, but 30% were held for Olympic related guests) it’s pretty easy to find enough rich people to pay ridiculous prices.

Without really thinking about it, supply and demand is around us daily. It is responsible for the prices we pay for goods and services, the way kids trade sports cards, the reason service providers know they can raise prices, and the reason exchange rates move up and down.

And it is exchange rates that will interest us in the next post.