Have you ever wondered if it was possible to buy a stock of a foreign company directly? I'm not talking about buying an international mutual fund or ETF - but real shares of a company that isn't from the United States?
There are many other stock exchanges in the world: Tokyo, Shanghai, Hong Kong, Australia, London, Toronto, and more. And there are companies listed on these exchanges that may not trade directly in the United States. And you may want to purchase shares in these companies.
It's possible, but it does take some effort (and the approval of your stock broker).
Here's what you need to know about buying stocks in a foreign company directly.
Why Purchase Foreign Company Stock Directly?
Buying stock in a foreign company, also called international trading, is another method of diversification. While there are proxies, such as ADRs, for gaining exposure to foreign firms, going direct cuts out the middle man and any effects that indirect exposure may have.
Buying foreign company stock is a more involved process than buying stocks in your country of residence. The first step is to find a broker that allows purchasing foreign shares directly.
Which Brokers Can I Use?
In the U.S., there are many brokers that allow you to purchase foreign directly, including:
Check with your broker to see if they offer international trading.
For example, if you want to use Fidelity, you have to meet certain requirements to trade international stocks.
How Does It Work?
Buying foreign shares requires a few more steps than buying shares on a local exchange. There’s also new terminology and concepts to learn. Here’s what to expect when buying foreign shares.
One of the first things to do is get a quote for the company you want to buy shares in. Foreign quotes are usually in a different format than local exchange quotes. You might use [company stock symbol]:[country code]. You’ll need to know the country code, which your broker can provide to you.
On U.S. exchanges, stock symbols have an associated identifier called a CUSIP (Committee on Uniform Securities Identification Procedures). On foreign exchanges, it is called a SEDOL (Stock Exchange Daily Official List).
When buying foreign shares directly, you can’t buy on margin. All shares are cash-secured. Also, liquidity can be low and spreads wide. To prevent market orders from being filled at prices well away from the quoted prices, brokers restrict orders to limit orders.
A limit order allows an order to fill at a specific price set by you. For example, if the bid/ask on a stock is 30.50/30.90, putting in a limit at 30.40 means the stock will need to trade down to that level before filling the order. It doesn’t matter how wide the spread is. As long as the stock trades at 30.40, the limit order can fill.
Unlike on a local exchange, foreign shares can’t be sold short. This means they can only be bought and sold (i.e., closed out). International trading is restricted to the daytime hours that the exchange is open. This means no after-hours trading.
The settlement currency must be set before placing a trade. The settlement currency is the country currency where funds settle from trades. When trading foreign company shares, there are two currencies involved — the one of country you are trading from and the one of the country you are buying foreign company shares in. Funds must be settled in one of the two countries. You can specify which one on your trade order form.
Also, whichever country stock shares are purchased in, they must also be sold there. You can’t buy shares in Japan and sell them in China, for example.
On U.S. exchanges, you are probably used to price increments of one cent. The one-cent increment is known as a tick. On foreign exchanges, the tick amount will be different. The tick amount will depend on the exchange and country.
What Are the Fees Involved?
Trading foreign company stock is more costly than trading on a local exchange. There are several costs involved:
- Commissions: These can be higher than local exchange commissions.
- Exchange-specific fees: These can include fees such as stamp duty, transaction levy, and trading fees.
- Foreign currency exchange fees: Just as you pay an exchange fee to convert U.S. dollars into a foreign currency, you must also pay a fee to use U.S. dollars as the settlement currency.
The various fees can range from just over zero percent of the trade amount to over 1.0%.
Buying Foreign Company Shares vs. ADRs
ADRs (American depositary receipts) are another way to buy shares of a foreign company through a U.S. exchange. ADRs are not foreign shares but instead receipts of foreign shares that are held by a bank in the United States. The receipts are used for trading the shares on U.S. stock exchanges. ADRs are basically proxies for trading foreign company shares.
Trading ADRs is the same as trading any share of stock on a U.S. exchange. While ADR dividends are paid in U.S. dollars, they are still subject to foreign tax withholding.
Trading foreign company shares can make your end-of-year tax filing a little more complicated. It’s best to discuss your unique situation with a tax advisor before trading foreign shares.
Just like ADR dividends, foreign share dividends can incur withholding taxes by the country of issuance. As a U.S. citizen, you can receive a tax credit on the amount withheld.
Trading foreign company shares may sound complicated, but once you place a few trades, it won’t seem such a big deal. Just keep taxes in mind and be aware of the additional cost.