What Does Denominated Stock Mean?

Stocks can be denominated in multiple currencies such as dollars and Euros.
i Comstock/Comstock/Getty Images

If you buy a stock listed on a U.S. exchange and then purchase the same internationally listed stock on a Canadian exchange, the quoted price of the stock will be different. Stock prices are expressed in terms of a specific currency. Stocks sold in the U.S. are expressed in dollars. In another country, which uses its own currency, stocks will primarily be listed in that country's home currency. Buying both local and foreign currency-denominated stock can provide diversification, but it also presents certain risks.

Dollar Denominated

When you buy U.S. goods, they are expressed in terms of dollars. Because of the size of the U.S. economy and the widespread use of dollars, some items are expressed in U.S. dollars even in other countries. For example, oil is bought and sold in dollars throughout much of the world, even though many of the countries buying and selling oil have their own currencies.

Foreign Currency Denominated

Buying a stock listed on an exchange outside your home country will likely mean you have purchased a foreign currency-denominated stock. For example, if you are a U.S. investor and buy a stock listed on the Australian Securities Exchange, it must be purchased in Australian dollars. A stock listed on a Canadian stock exchange is denominated and quoted in Canadian dollars.

Exchange Rates

Currencies are subject to fluctuating exchange rates. These are usually determined by market supply and demand but occasionally are fixed at a certain price relative to another currency. Fluctuating exchange rates can increase or decrease the returns on a foreign currency-denominated holding. Investors must consider whether the stock price will rise or fall and whether the foreign currency will go up or down relative to their home country's currency.

Assuming the stock price stays the same, if the foreign currency rises, this will increase the investment return. This is because when the stock is sold and converted back into the home currency, more home currency can be purchased, since the foreign currency increased in value. If the foreign currency declines, the return will decrease.

Purchasing Diversification

Buying stocks denominated in other currencies is considered a form of diversification. When you hold assets in multiple currencies, if one currency falls relative to the others, the exchange rate losses are partially offset by the corresponding rise in the other currencies. Purchasing foreign currency denominated stocks can be done through a broker and will require the simultaneous buying of the currency in which the stock is denominated.

the nest