How to buy overseas shares
Buying overseas stock is a great way to diversify your portfolio. Here's how to do it.
UK companies come in all shapes, sizes and sectors.
While you can build a diverse portfolio just investing in the UK (since many companies generate revenues outside the UK), there are big companies missing from the UK market.
So, why would I buy overseas shares?
There are two key reasons for looking at overseas stocks: stronger growth and better diversification.
Technology stocks tend to be strongly linked with structural improvements in the economy. Leaving them out of a portfolio risks missing out on an important area of future growth.
Lots of people look to the stock market to support their retirement savings or to save for their children’s education. It seems sensible to look to the future rather than looking back. Think e-commerce rather than the high street!
The same is true for countries. The US, UK, Eurozone and Japan are mature economies with higher debt and limited growth prospects.
There are far higher growth prospects in emerging markets such as India, China or Vietnam, which are industrialising, urbanising and have large, young populations, embracing technology. This creates a fertile environment for companies looking to grow their profits and can be a good option for long-term investors.
Looking both to new sectors and new countries brings greater diversification. Whereas the UK and US economies tend to be linked, there is a looser relationship between, say, the UK and India. That means that while the UK stock market may be struggling, India’s could still be rising. This gives some protection to your portfolio.
Then there’s the point that while the UK may have good companies that are international in nature, they may not be the best in the world. There may be better pharmaceutical companies, or oil companies, or telecoms companies. By broadening your outlook, you can super-charge your portfolio.
What to consider when buying overseas stocks
- Time zone
- Cost of buying and selling
- Depository receipts
Currency fluctuations can work to your advantage or disadvantage, but it’s worth knowing where you’re exposed.
For example, if sterling depreciates against the US dollar, your holdings in the US will become more valuable. If sterling rises, they may go lower. Many companies are international in nature, even when they are listed in, say, the US or European stock markets and therefore the currency will tend to even out over time.
If you are buying shares on an international exchange, you may not be buying in real time. This means you may have to be clear about an acceptable buying price and selling price. This is particularly the case when dealing in Australia, Japan or the Far Eastern markets.
Cost of buying and selling
Modern trading technology means that many stockbrokers can now buy international shares for around the same commission that you pay to buy local stocks. Check you’re not paying extra.
However, if your broker doesn’t offer it, consider moving to one that does, or opening an account with a stockbroker abroad. This may sound like oligarch territory, but it’s not as complex as you think. It is worth noting that foreign currency can’t be held in ISAs, so buying and selling international shares can be more expensive.
Different countries have different tax rates. The UK charges 0.5% stamp duty, but it can be higher or lower elsewhere. Ireland, for example, charges 1% stamp duty on all share purchases
You may also fall foul of “withholding tax” – particularly onerous in areas such as the US. This is where tax is retained for a period of time.
One way to get international exposure in your portfolio is to buy shares listed on a foreign exchange that have depository receipts listed in the UK.
These have the advantage of trading in your own timezone, usually in your own currency and are available on a broad range of companies.
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