Shares Made Simple author Rodney Hobson explains international sharedealing, from picking a broker to stocks to buy for a diversified portfolio.
Technology has completely transformed stockmarket investing abroad, just as it has at home. Not only is it now far easier to be fully informed about foreign companies, but it is simpler to trade in their shares and the whole process is so cheap that it takes only a tiny nibble out of your cash pile.
Unlike the olden days, you no longer have to pay exorbitant fees to your broker, plus a broker in the foreign company, plus a trader on the exchange floor. The extra middlemen have been cut out. Nor is there the long wait that used to occur between placing an order and its execution: deals are done in seconds, not minutes.
Moreover, prices are transparent. You don’t have to trust your broker to get the best price – you can see how much the shares are trading at before you press the buy or sell button. If your broker doesn’t offer trading on these terms, find another – one that operates in the 21st century.
A wider choice in many ways
Investing overseas obviously widens your choices considerably in so many ways. It not only adds thousands of potential companies but can also open up whole new sectors to your options. For instance, while it is possible to buy shares in UK car salesroom operators, we don’t have any car manufacturers listed on the London Stock Exchange. Sectors such as pharmaceuticals, where there has been heavy consolidation through acquisitions and mergers, can be sparsely represented in London, but there are well-known alternatives in the US and Europe.
And while many of the largest companies quoted in the UK have a wide geographic spread of operations, you may get better access to thriving parts of the world economy by going direct to an exchange in the relevant region.
Available tax wrappers
You can buy shares through a standard trading account, in which case you will be liable for income and capital gains taxes just as with UK shares. However, overseas shares, like UK-quoted shares, can be held in an Isa or a self-invested personal pension (Sipp), allowing them to grow free of capital gains and income tax.
There is currently an annual Isa allowance of £20,000 for each tax year starting on 6 April. You lose the allowance for any given year if you don’t use it by the tax year end, and it’s sensible to invest it early in the tax year. The £20,000 is a total allowance that can be split between UK and overseas stocks, so you cannot invest £20,000 domestically and another £20,000 into foreign investments.
The UK regulations are clear. To qualify for inclusion in an Isa or Sipp, a stock must simply be listed on a recognised stock exchange. That means you can hold shares and funds from almost anywhere in the world. A list of the major exchanges can be found at this link.
Bear in mind that your broker’s charges may be slightly higher for buying and selling overseas stocks than they are for UK transactions. However, you do not have to pay stamp duty, which saves £5 for every £1,000 in buy orders.
Your first step is to find a broker that can handle your orders. If you already have an account with a traditional or online stockbroker, you should be able to use that account to trade in shares on any major overseas stockmarket. If not, you can easily set up an additional trading account with any online broker offering overseas trading; it is easy to find a list of contenders using your computer search engine.
Do not expect any website to offer access to absolutely every stock exchange worldwide, but online stockbrokers should allow you to buy and sell on any major market. The broker’s website should contain a list of available exchanges and the cost of trading on each. If it doesn’t, find one that is fully transparent.
Comparing platform prices
The difficult bit is to sift through the candidates to find one that offers the best pricing structure to suit your needs and investment strategy. Possible charges include a flat charge for handling your account; a flat-rate charge per trade, possibly on a sliding scale according to the size of the order; or a percentage of the value of the trade, again on a sliding scale. Some sites charge a foreign exchange fee on overseas share buying and selling.
Let’s look at a representative sample of some of the best-known online brokers. This list is only an illustration and is not exhaustive, nor is it a recommendation to use any one of these. These are standard charges and you may pay less if you make more than a minimum number of transactions. Remember that charges can change subsequently.
Charges may be more expensive than for trading on the London Stock Exchange but you do not have to pay 0.5% stamp duty on purchases.
interactive investor: You can trade on 17 overseas stockmarkets. There are three service plans involving a monthly fee, but those wishing to invest overseas will be drawn to the Super Investor plan, where US shares cost £4.99 and international shares £9.99. The monthly fee for this plan is £19.99. For interactive investor there is a foreign exchange fee of 1.5% for deals under £25,000, 1.25% for deals between £25,000 to under £50,000, 1% for deals between £50,000 to under £100,000, 0.5% for deals between £100,000 to under £600,000 and 0.25% for deals between £600,000 to under £1 million
AJ Bell: 24 overseas markets are available with a quarterly charge of £7.50 plus £9.95 per trade. There is a foreign exchange charge ranging from 1% for deals under £10,000 to 0.25% over £30,000.
Hargreaves Lansdown: Trading is on New York and Toronto exchanges plus 16 European ones. There are no annual charges for holding shares in an ordinary trading account, but for an Isa or Sipp you pay 0.45% of the value of the account, up to a limit of £45 in an Isa and £200 in a Sipp. The charge per trade ranges from £5.95 to £11.95 depending on how many trades you made in the previous month, and there is a forex charge ranging from 1% on the first £5,000 to 0.25% over £20,000.
Next you need to decide where you want to invest. It is highly advisable, especially if you are new to overseas investing, to select major, well-regulated stock exchanges where the rules are similar to those in London, where the rule of law prevails and there are enough traders to provide liquidity.
Turbulent euro/sterling exchange rate has hit foreign holdings
Technicalities, dividends and tax
If you choose the main US, Canadian and European markets you will probably be buying what are known as CDIs (standing for Crest depository interests) rather than the shares themselves. This is nothing to worry about; it’s effectively a technicality that makes dealing easier and cheaper. CDIs are UK securities representing an underlying interest in an overseas security and can be bought and sold easily in the UK. You are still entitled to any dividends paid by the companies you invest in.
A similar arrangement applies to US investors buying UK stocks – they buy what are known as American Drawing Rights (ADRs), which are an entitlement to the shares rather than the shares themselves.
Any dividend income you receive in overseas markets will be subject to that country’s relevant withholding tax.
If you are looking to invest in US-listed investments then you will need to complete a W-8BEN form to declare that you are not a US citizen. You will then pay tax of 15% on all dividends received, rather than the full rate of 30%. (This is not necessary for a Sipp and you will receive the full dividend without a tax deduction.) For Canadian investments, you will need to complete an NR301 form to reduce your tax on dividends from 25% to 15%. You will see a link to these forms on the websites of online brokers.
Trading hours in European markets are broadly in line with normal UK market hours of 8.00am to 4.30pm, so it is easy to check how your holdings are going. Trading in the US and Canada runs from 2.30pm to 9.30pm London time. Trading in the Pacific region takes place while we are asleep, so there is less chance to react quickly to breaking news.
The two biggest stock exchanges in the world are both based in New York. The New York Stock Exchange (NYSE), founded in 1792, is the world’s largest in terms of the aggregate market capitalisations of companies listed on it, with 2,800 companies valued at a total of $30 trillion (£22 trillion). Nasdaq has been going less than 50 years but has 3,300 companies quoted on it, and it has the most trades per day of any exchange in the world. It has tended to attract technology and smaller-sized companies.
Other reputable, liquid exchanges you may wish to consider include the Tokyo Stock Exchange – the third largest in the world, ahead of London – Euronext, Hong Kong, Singapore and Sydney.
It is just as easy to check the current share price on an overseas exchange as it is for London-based shares: just type the name of the company plus the words “share price” into your search engine, or visit the trading platform you use and type in the name of the security. However, you will see the relevant price in the currency used by that exchange, not a sterling equivalent.
One major risk that any investor anywhere in the world runs when investing in an overseas market is the potential change in foreign exchange rates. If the dollar rises against the pound, the value of any dollar-denominated shares rises correspondingly; however, if the dollar falls then you automatically lose in sterling terms.
Foreign exchange matters
This makes it harder to keep track of how well your investment is doing. Also, any dividends will be paid in the local currency, so forex movements will affect your income when it is converted to sterling.
The past five years have been particularly turbulent for sterling because of the protracted uncertainty over Brexit, but investors in overseas markets must be prepared to take the rough with the smooth.
Against the euro, for instance, sterling rose from €1.2 to nearly €1.5 over the course of 15 months to September 2015 – a gain of 22%. In other words, any UK resident holding shares priced in euros saw their holdings lose a fifth of their value. However, those who clung on recovered all the losses and more besides as the pound sank to €1.1 a year later, meaning euro holdings effectively soared by a quarter.
The world’s major stock exchanges
|Stock exchange||Approx. no. of companies listed||Main index|
|New York||2,800||Dow Jones Industrial Average/S&P 500|
|Nasdaq||3,300||Dow Jones Industrial Average/S&P 500|
|Singapore||800||FTSE Straits Times|
International share ideas to diversify a UK portfolio
If you are new to overseas investing, it is sensible to go for internationally known names, companies with solid revenue and profits paying well-covered dividends. You can look for riskier plays as you gain in experience and confidence.
This is particularly important because it takes a little more effort to keep track of how well foreign companies are doing. Apart from the Financial Times, British newspapers carry coverage of only the largest overseas companies, if any. You tend to hear mainly of disasters, such as two Boeing aircraft crashing in similar circumstances in different parts of the world, so you learn what stocks to avoid rather than which to buy. Moreover, unless you live in a country, or at least visit it regularly, it is harder to fully comprehend what is going on there.
You can follow how each market generally is faring by following the movements of that market’s main index. To check on the basic statistics of an individual company, such as its price/ earnings ratio and yield, search for the company on the website of any major online broker. You will also be able to view a share price chart going back five years.
Build a diversified portfolio, with stocks in different countries, specialising in different sectors and operating in different geographic areas. The wider you spread your net, the more you will realise that it is just like investing in the UK. The basic principles are the same. The table above gives an insight into well-known companies on overseas stock exchanges that could form a typical balanced portfolio. This list is not intended to be a recommendation that you buy shares in all or any of the companies featured. You must do your own research and form a judgement about what investments meet your criteria.
Overseas stocks for a balanced portfolio