London’s stock market is home to hundreds of attractive businesses, but not every industry or sector is comprehensively represented.
If you want to buy shares in companies such as Amazon, BMW or Samsung, you will have to trade overseas.
A decade ago, this would have been difficult and costly. Today, it’s straightforward. A desire to be invested globally has meant that most big investment shops have radically improved their services and cut their charges.
If you don’t want to pick your own stocks, there are many funds available to buy that invest in global shares for a very low cost.
However, there are some potential pitfalls and unexpected costs to watch out for.
Here is a guide for how to buy and hold overseas stocks.
Many investment shops offer the option to buy overseas shares within an Isa, self invested personal pension (Sipp) or dealing account.
That means every time you make a purchase, there is a conversion from pounds to the currency you are buying in, and every sale you make is converted back to pounds.
This comes with costs. You’ll pay the standard dealing fee charged by the service for buying and selling shares, presuming there is one, plus the cost of converting sterling.
For example, to buy £2,000 worth of American-listed Apple via Hargreaves Lansdown would cost £11.95 for the dealing fee, then 1pc for the currency conversion. That’s a total cost of £31.95.
To do the same via AJ Bell would cost £9.95 for the dealing fee and 1pc for the foreign exchange charge, or £29.95.
These conversion charges apply both when buying or selling a stock, making the costs significant.
Which investment shop will be best for you depends on the size of your portfolio, how often you want to trade, and in what markets.
The services will charge an annual fee, either as a percentage of your portfolio or a flat cost in pounds and pence.
This table will help guide you to the cheapest Isa for your portfolio size, and this one to the cheapest Sipp. This guide explains all you need to know about Isa provider service levels.
Some investment shops allow investors to hold foreign currency in their accounts. This means you can trade directly in the same currency as the shares you are buying, instead of repeatedly incurring currency exchange fees.
Foreign currency cannot be held inside an Isa, so if you want to buy and sell in foreign currency, you will need to use a regular dealing account – with no tax protection – or a Sipp.
There will still be a charge to trade, and you’ll still need to pay to convert the money into the required currency. But you can fund the account using a specialist currency exchange service such as Transferwise or Moneycorp to keep the exchange fees down.
You exchange pounds from your current account into the required currency, and use it to fund the account.
Interactive Investor, which recently acquired TD Direct, offers international share dealing in 17 countries. You can hold up to nine different currencies in a dealing account or Sipp, including dollars, euros, Hong Kong dollars and Swiss francs.
If you want to use Interactive’s own exchange service, there is a 1.5pc fee.
Charles Schwab’s UK account, which has a minimum of $25,000, lets you hold US dollars and invest in American shares. It costs $4.95 to buy and sell shares.
If you invest in foreign shares using pound sterling, you are directly exposed to any fluctuations in the exchange rate between sterling and the currency in which the shares are priced.
If you invest using local currency, that exposure is removed – up until the point you want to move the money back into pounds again.
There are potential tax implications for overseas shares. Some countries automatically deduct tax from dividends at source, which may result in you paying tax twice. In many cases there will be a “double taxation” arrangement between Britain and the other country to prevent or limit this, or you may be able to reclaim the extra tax paid.
Special paperwork may be required. For instance, those who want to buy US shares will need to fill in a W-8BEN form, which qualifies the investor to pay a reduced rate of tax on income from their shares.
The British stock market has traditionally been very rewarding for investors who want dividend income, but companies in other markets, especially the US, are also excellent payers, and there are far more of them. Dozens of big US firms including Coca Cola, Johnson & Johnson, AT&T and Proctor & Gamble yield around 3pc or more and have long track records of increasing dividends.
But beware, if you use a sterling account to hold these stocks, the dividends will be converted back into sterling, and will be subject to currency exchange charges.
If you don’t want to buy and sell individual stocks – something only suitable for a confident, knowledgeable investor – funds that invest in overseas shares are an option.
Read here for our guide to the cheapest global tracker funds, here for our Telegraph 25 top fund picks, and here for our guide to the different types of fund.
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