Canadians are able to invest in American companies. Before taking the plunge into the American stock market, one should consider the current Canadian/American exchange rate. One American dollar can buy approximately $1.31 Canadian dollars- this means the Canadian dollar is relatively affordable for Americans. Where does this leave Canadians? From an investment perspective, it would seem as though Canadians are at a disadvantage. However, this may not be the case. If a Canadian investor habitually saves American dollars, say $50 per month, and invests it in an American company, such as Visa, they may be earning money as the currency continues to appreciate.
Investing in an American, dividend paying stock could yield multiple benefits for the Canadian investor. First, an investor could be collecting dividends. Dividends are additional cash-flows created when a stock is owned. Dividends are often monthly, quarterly or annually paid out to investors. Second, investors can be rewarded through capital appreciation which occurs when the stock’s price increases. Finally, a Canadian investor can be rewarded when the American dollar continues to appreciate in value. Once a Canadian has bought American dollars and then invested those dollars into an American stock, those dollars are gaining value when the exchange rate continues to appreciate.
Although no one can really say for certain whether the American currency will continue to appreciate or depreciate, Canadian Dough has learned of an economic theory that explains that an exchange rate is connected to a country’s exports. As a country exports goods, the importing country naturally demands the exporting country’s currency. This increased demand in a country’s currency leads to an increased value in the exporting country’s currency. Its essentially a theory of supply and demand. Therefore, as a country exports more, its currency is demanded more and its currency increases in value. Although this is only one of many economic theories, it certainly demystifies theories of the American dollar’s projection.