With a market value of over $4.48 Trillion, the Hong Kong stock exchange is the fifth largest in the world. Therefore it is perfectly natural that when looking to make some good investments, one turns to Hong Kong. However, if you make use of TD Ameritrade as a broker, you should know if you can trade Hong Kong stocks with them. So can you?
No, TD Ameritrade does not provide a platform for its customers to directly purchase foreign stocks. However, there are other indirect means like ADRs and ETFs which customers can use to buy foreign stocks with TD Ameritrade.
In this article we’re going to be looking at:
- Whether TD Ameritrade’s policy might change after the merger with Charles Schwab is completed or not,
- How you can invest in the Hong Kong market through ETFs using your TD Ameritrade account,
- What ADRs are and how you can trade Hong Kong stocks with them, and
- What Over-the-counter trading is.
Will the Merger with Charles Schwab Change Anything?
At this point, this remains unclear. Although the acquisition of TD Ameritrade by Charles Schwab was announced back in 2019, due to the size of both brokers, it is expected that the streamlining of operations will be finalized sometime between 2022 and 2024.
As long as Charles Schwab does not maintain TD Ameritrade as a separate entity (it is actually a subsidiary of Charles Schwab), it is likely that TD Ameritrade customers will be able to directly trade global stocks once the streamlining of operations is finalized. This is because Charles Schwab already allows its customers the ability to directly trade foreign stocks.
How Can You Trade Hong Kong Stocks with ADRs?
ADRs mean American Depositary Receipts which are negotiable certificates issued by U.S. depositary banks. They represent a specified number of shares of a foreign company that could trade on a U.S. exchange or over-the-counter.
The access to ADRs is only possible when U.S. banks purchase stocks on a foreign exchange, hold them as inventory, and then issue them as certificates with value in U.S. dollars for domestic trading. In most cases, a single ADR has corresponding value with a number of shares in the foreign company determined by the depositary bank.
Since this method also allows foreign companies to raise funds from American investors while not being listed on an American exchange, the U.S. banks issuing these ADRs require that the foreign companies provide detailed information that American investors can evaluate.
There are two types of ADRs; The Sponsored and Unsponsored ADRs. Sponsored ADRs are issued by US banks on behalf of a foreign company. Usually a legal arrangement, it is tradition for the foreign company to pay the bank for all ADR costs and maintain control over the ADRs, while the bank coordinates transactions with investors. However, sponsored ADRs are further categorized according to how much the company complies with SEC regulations.
Unsponsored ADRs, on the other hand, are simply issued by American banks. To issue these, the banks do not work together with the foreign company they are issuing for. They simply purchase the foreign stock and then issue ADRs. This means that with unsponsored ADRs, there could be different offerings from different banks for the same foreign company.
ADRs are also categorized depending on the level of access the company has to U.S markets. Under this categorization, level 1 ADRs are those of companies that don’t qualify to be listed or are not interested in listing. These types establish a trading presence for the company but cannot be used to raise capital. They are also riskier for investors sincethe SEC does not regulate them very strictly.
Level 2 ADRs also establish a trading presence, but cannot raise capital. However, they have to meet more SEC requirements so they get a higher trading value.
Level 3 ADRs are, however, the most prestigious because the issuer is subject to full reporting with the SEC so they are also more trustworthy. With a level 3 ADR, the issuer can carry out an ADR public offering on a U.S. exchange and raise capital.
The process of buying an ADR depends on the ADR’s category. In most cases, level 3 ADRs, the lowest level of sponsored ADRs, and unsponsored ADRs trade over-the-counter. All other types are usually registered with the SEC and trade on the NYSE or Nasdaq.
What is Over-The-Counter Trading?
Over-the-Counter trading or OTC involves trading securities that aren’t listed on major stock exchanges, but instead accessing them only through a broker.
When trading OTC, transactions can take place using the Over the counter Bulletin Board (OTCBB) or Pink Sheet listing services. And as a discount brokerage firm, TD Ameritrade does not recommend customers to trade securities listed on these exchanges. With that being said,they do accept orders for such securities.
How to Invest In the Hong Kong Market on TD Ameritrade through ETFs
Of all the available options, investing in Hong Kong stocks through ETFs is probably the safest and most advisable. An ETF is best described as a collection of other securities. Just like a stock, ETFs also trade on exchanges, but their main purpose is to track the prices of a single commodity or a large number of different commodities, depending on how they are structured.
As a TD Ameritrade customer, you get access to over 2,300 ETFs which you can trade without paying any commissions, as long as you trade online. An amazing example is the iShares China Large Cap ETF ($FXI), a fund that tracks the FTSE China 50 Index. The FTSE China 50 Index is designed to measure the performance of the largest companies in the Chinese equity market which trade on the Stock Exchange of Hong Kong.
Another great example is the iShares MSCI Hong Kong ETF ($EWH), a fund that tracks the MSCI Hong Kong 25/50 Index. The MSCI Hong Kong 25/50 index is a free float-adjusted market capitalization-weighted index that always majorly consists of stocks traded on the Hong Kong’s Stock Exchange.
Although TD Ameritrade does not allow its customers to directly trade Hong Kong stocks on its platform, customers can still trade some using ADRs that trade over exchanges or OTC. TD Ameritrade itself warns of the extreme volatility that comes with trading stocks OTC, and since most Hong Kong ADRs are only available OTC, another option to consider is ETFs.
Investing through ETFs is generally a very good option. There are multiple ETFs available on TD Ameritrade to track different sectors. The only disadvantage here is that you will not be able to pick specific companies to invest in.
Also, remember that TD Ameritrade customers might soon be able to directly trade foreign stocks once everything relating to the merger with Charles Schwab is completed.
If you have enjoyed this article, please share it with others. If you have any questions, please let me know in the comments and I will answer them as soon as I can.
‘Till next time…
Over the past years, I have discovered several tools and products that have helped me tremendously on my path to financial freedom:
P.S.: The links below are affiliate links, which means I receive a small commission at no extra cost to you when you sign up for one of the services. Thank you for your support!
1) Take a look at M1 Finance, my favorite broker. I love how easy it is to invest and maintain my portfolio with them. I can set up automatic transfers, rebalance my portfolio with one click and even borrow up to 35% of my assets at super low interest rates!
2) Fundrise is by far the best way I've found to invest in Real Estate. You can diversify your portfolio by investing in their eREITs or even allocate capital to individual properties (without the hassle of managing tenants!).
3) If you are interested in crypto, check out Coinbase. I've started allocating a small amount of assets to the growing crypto space and Coinbase has just been a breeze to use. Once you register, make sure to also open a Coinbase Pro account to buy crypto at the lowest fees on the market (just 0.1%!).