The Smart Way to Buy Foreign Stocks
A decade ago, the idea of buying a stock trading in a foreign country was a pipe dream for all but a select few investors. In fact, typically only wealthy investors and institutions could invest abroad.
The SEC now allows foreign brokers to sell directly to U.S. investors. This practice had previously been banned since the Wall Street crash of 1929. Also, many more U.S. brokerages are direct access to the markets in Toronto, Tokyo, Paris, Hong Kong, Australia and London, among others.
Now, most of your regular online discount brokerages can't give you direct access to international markets just yet (however, this is changing by the day). For now, you shouldn't let this be a hindrance.
If you're looking to access overseas markets, you simply need to start an account with a brokerage that offers international trading (and we profile several in the following sections).
In fact, investors who take a few minutes to open an account with one of the brokerages we list can be trading on the foreign markets today. But for those who are still on the fence about starting a new account to invest internationally, you may not know exactly what you are missing.
Why Some of the World's Greatest Companies Avoid the U.S. Markets
As you may know, there are a number of foreign firms trade on U.S. exchanges in the form of American depository receipts (ADRs). ADRs represent ownership positions in the foreign company's shares. They trade on U.S. exchanges and pay dividends in U.S. dollars. These shares are as easy to buy as any common stock, and can be bought in any brokerage account.
However, ADRs they aren't the thriving marketplace
Sarbanes-Oxley imposed onerous and costly new requirements on listed companies. According to one survey, a Fortune 500 company could expect an average compliance cost of $5.1 million a year in the wake of the legislation. It's no surprise that new ADR issues are almost non-existent.
Why should international companies go to all that trouble when legions of eager new investors are cropping up around the world, especially in the emerging economies of Asia? Unfortunately, the pool of ADRs that U.S. investors can dip their toes into is drying up fast.
Even some of the world's premier companies -- including Taiwan's Hon Hai Precision Industries, the world's largest contract maker of electronics -- are off-limits to U.S. investors. These companies haven't bothered to register with the SEC, and don't even have ADRs.
The point is, while they provide valuable international access, if you want the best foreign stocks, you can't just sit back and buy ADRs. Instead, by expanding your brokerage choices just slightly, you can buy practically any security in the world.
What to Look for in a Broker
Do the broker's trades actually take place on a foreign exchange, or on the U.S. "pink sheets"? Pink sheet transactions usually have wide "spreads" between the bid and ask prices for a stock. These spreads create a hidden cost that many investors aren't even aware of. Buying or selling directly on a foreign exchange helps to reduce this problem.
What are the specifics of dealing with the exchange rates on trades and dividends? Currency exchange should only cost a few tenths of a percent on a trade, but unwitting investors can be hit with much higher costs if they don't do their homework.
What is the commission/fee structure for trading overseas? Are there minimum transaction amounts, special fees, hidden costs or any other miscellaneous fees? Most brokers should be able to provide a list of all charges for an overseas trade before you invest.
Are you allowed to place limit orders on your overseas trades? Just as with thinly traded U.S. securities, there may be a large spread between the bid and ask prices for a foreign security. By using a limit order, you can ensure you buy or sell a security for a certain price or the order is canceled.
The firms in our next lesson represent some of the most promising options for buying foreign stocks.
Brokerages Opening Foreign Markets for U.S. Investors
Euro Pacific Capital
Based in the United States, Euro Pacific Capital is a full-service broker specializing in foreign markets and securities. The brokerage has direct relationships with a number of foreign trading desks, which helps its clients avoid the large spreads often imposed by U.S. market makers of foreign securities, thereby reducing costs.
Although the firm specializes in foreign investments, it provides access to all U.S. equities. The brokerage also offers a full array of services ranging from retirement and trust accounts, complete financial planning, checking accounts, life insurance, and annuities.
Markets Traded: Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, Colombia, Costa Rica, Denmark, Egypt, Finland, France, Germany, Ghana, Greece, Hong Kong, Iceland, India, Ireland, Israel, Italy, Japan, Kenya, Korea, Luxembourg, Malaysia, Mexico, Morocco, Netherlands, New Zealand, Nigeria, Norway, Panama, Peru, the Philippines, Portugal, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, Tunisia, United Kingdom, United States, Venezuela, and Zimbabwe
A name familiar to many, discount online broker E*Trade is a major broker in the international trading arena. The firm has opened up six of the largest international markets to its clients, all of which are accessible through its online trading platform. Just as you would enter an online trade for a U.S. security, you can easily do the same for foreign securities with E*Trade -- and even do it in the local currency.
Trading with the brokerage may be a popular choice, especially since millions of investors already have an E*Trade account. And while the brokerage offers direct access to only six popular foreign markets, it gives you indirect access to stocks in many more countries. That's because companies in smaller markets often list their shares on a nearby larger market's stock exchange. So a stock may trade in Poland, but it is likely to also have shares listed on a German exchange as well.
E*Trade also offers a number of research and investing tools, as well as options trading, retirement planning, and online banking.
Markets Traded: Canada, France, Germany, Hong Kong, Japan, United Kingdom, and United States
Started in Jacksonville, Fla., EverBank offers an online discount brokerage, EverTrade, as one of its many diversified financial services. EverTrade gives customers access to an array of foreign markets, as well as domestic securities and mutual funds. There are no account minimums or maintenance fees, although the US$50 per trade charge for foreign equity trades may strike some investors as a little steep. However, considering the prices charged by many full-service brokers, this amount is not too exorbitant.
Designed for both experienced and novice investors, EverTrade offers a wide variety of research resources, tools and advice. Whilethe convenience of online trading, EverTrade also provides banking services through its EverBank counterpart.
Markets Traded: Australia, Austria, Canada, Denmark, Finland, France, Germany, Hong Kong, Italy, Japan, Mexico, Netherlands, New Zealand, Norway, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Thailand, United Kingdom, and United States
Interactive Brokers is a discount brokerage that mostly caters to professional traders -- hedge funds, money managers, and other institutions that trade tens of thousands of shares every day -- but it also accepts individual investor accounts.
That's a huge boon for anyone looking to buy foreign securities, because in addition to the U.S. markets, Interactive Brokers provides investors access to securities on 70 exchanges worldwide.
One caveat: Although its individual-investor systems are user-friendly, Interactive Brokers tends to cater to more sophisticated investors -- befitting its initial incarnation as a trading service for professionals. In fact, it requires individual investors to state that they have executed at least 100 trades before opening an account. So if you're truly a novice investor, Interactive Brokers might not be the best.
Markets Traded: Australia, Belgium, Canada, France, Germany, Hong Kong, Italy, Japan, Mexico, Netherlands, Singapore, South Korea, Spain, Sweden, Switzerland, United Kingdom, and United States
NobleTrading is an online discount trading company based in New York. Similar to Interactive Brokers, Noble is designed with the experienced investor in mind. Investors can place trades through the firm's online trading platform or by speaking with a representative over the phone. The company prides itself on customer service and promises the ability to speak with a live representative immediately when calling -- and also has online chat available if you prefer. Either way, this focus on customer service is a plus for those unfamiliar with international trading.
Markets Traded: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Malaysia, Mexico, Netherlands, New Zealand, Norway, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Thailand, United Kingdom, and United States