Investing in US stocks can be an excellent way to gain exposure to some of the world’s leading companies making waves on Wall Street, from tech giants to innovative startups.
Before you jump in and start trading, it’s essential to understand the costs involved. And, more importantly – how to keep them as low as possible. Here’s your ultimate guide to buying US stocks in the UK without breaking the bank.
One of the key areas to keep an eye on if you’re investing in US stocks and looking to keep your costs at rock bottom levels is the trading commissions.
Simply put, commissions are fees that you normally pay to buy or sell shares. Usually it’s a flat fee, £5 per trade for example. Sometimes it’s a percentage fee based on the size of your trade. However, not all investing platforms charge these commission fees.
If you use a zero commission* platform like Robinhood, you can buy and sell shares to your heart’s content without racking up any pesky commission fees.
This has a number of benefits:
If you’re able to buy and sell fractional shares (pieces of stocks), then zero trading commissions become even more valuable because you can invest smaller amounts with minimum costs.
Alongside trading commissions, the next thorn in your side is usually currency conversion costs.
If you’re in the UK and investing in US shares, because they’re denominated in USD – you’ll usually need to pay a foreign exchange (FX) fee for the privilege of switching your pounds sterling to US dollars.
Usually, the FX fee will be a percentage, so the total amount you pay depends on the size of your trade. With UK investing platforms, FX fees can vary wildly and go as high as 1.5%, which is a significant chunk of change.
If you can keep your FX fees to a minimum, this will ensure you don’t get stung when switching your pounds to American dollarydoos to invest.
Pretty much every platform out there charges some sort of FX fee for international investments. If you want the cheapest option around, it’s Robinhood, because they don’t charge you an FX fee (a small 0.03% third party fee still applies).
If you invest in US stocks that pay dividends, Uncle Sam will want to take a cut. They went to war with the UK over taxes back in the day, so I guess some sort of payback is warranted.
So, the US government applies something called a “withholding tax (WHT)” on dividends paid to non-US investors. However, thanks to the special relationship between the UK and US, investors can reduce this tax from 30% to 15% by completing a “W-8BEN form“.
This might sound complex and confusing but it’s usually dead simple. Once you’ve opened up an account with an investing platform, it should prompt you about completing a W-8BEN form. After you’ve filled out the online form, you’re good to go and everything else is automatic.
Most people don’t realise this but even if you’re holding US investments in a stocks and shares ISA, you still pay the 15% WHT on dividends, which is why ISAs aren’t completely “tax-free”.
You’re not alone. Even the stock market has to put up with a weekday 9 to 5 grind. Well, technically the US stock market operates from 9:30am to 4:00pm – lucky them!
Why does this matter for buying and selling US shares? These days, due to fancy technology and our insatiable appetite for stocks, some of the best trading apps allow you to invest outside ordinary market hours.**
However, if you plan to do this, it’s important to remember that prices can be more volatile because of the lower liquidity (fewer buyers and sellers available) and you could end up paying more for a stock because not everyone is up at 6am making trades.
Trading around the clock is a useful feature but it’s important to keep an eye on market prices. You can circumnavigate some of these potential obstacles by making the most of different trading order types like limit orders.
Access to US stock markets is now easier than ever, and it can be cheaper than ever if you tread the right path.
If you want to invest stateside, make sure you use a platform that has no trading commissions, low FX fees, and the option to invest smaller amounts of money with fractional shares.
*Commission-free trading refers to $0 commissions on stocks for Robinhood self-directed individual brokerage accounts that trade U.S. listed securities and ADRs. Keep in mind, contract fees apply when trading options and other costs such as regulatory fees may also apply to the brokerage account.
**Robinhood’s 24 Hour Market is available from Sunday 8 PM ET to Friday 8 PM ET. Trading outside of market hours involves additional risks like increased price volatility and lower trading volume.
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
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