Three good reasons why stock market investors must look beyond the UK
Our columnist explains why investors should consider international stocks and the best way to buy them.
5th December 2018 11:09
Leading industry commentator, accomplished author and interactive investor columnist Rodney Hobson explains why investors should consider international stocks and the best way to buy them.
Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.
Buying equities has never been so easy or inexpensive – and that applies as much to shares listed on overseas stock markets as it does for shares quoted on the London Stock Exchange.
The technology that has transformed share dealing in the UK applies equally to foreign exchanges. It has reduced dealing costs, made share prices more transparent, increased the amount of information readily available and speeded up the process of buying and selling.
Large overseas exchanges are just as liquid as London, so spreads between buying and selling prices are likely to be comparable and you should have no difficulty selling stocks if you decide to get out. Your shares will be held in the same account as your UK ones.
It is sensible to invest through recognised, properly run exchanges and the best place for a beginner is probably New York, where the two largest stock exchanges in the world are based within the world's largest economy, the United States. These are the longer established New York Stock Exchange and the Nasdaq, which has thrived by attracting technology companies.
Frankfurt, Hong Kong and Singapore are other perfectly accessible stock exchanges. Although these exchanges operate independently from each other, with little overlap of shares quoted on more than one exchange, they tend to move up and down pretty much in line with each other.
The Tokyo Stock Exchange, the third-largest globally, is also a possibility but has tended to be a difficult one for Westerners to break into. It may be better to invest through an investment trust or fund specialising in Japan.
If you are new to overseas investing it is sensible to go for internationally known names, companies with solid revenue and profits paying well-covered dividends. You can look for riskier plays as you gain in experience and confidence.
Trading in overseas stocks can be slightly more expensive in terms of dealing fees. Currently, interactive investor has a standard charge of £10 per trade in London and New York, or £6 for frequent traders, and £20 for other exchanges (£16 for frequent traders).
However, buying overseas stocks does not carry the 0.5% stamp duty imposed on buying UK stocks, so trading can actually work out cheaper.
Advantages
1) Wider range of companies and sectors
Some sectors such as the heavyweight technology stocks and car manufacturers are underrepresented or non-existent on the London Stock Exchange, so going abroad may be the only way in. This is also an important consideration in sectors where there has been heavy consolidation such as pharmaceuticals.
2) Wider geographic spread
Although many companies in the FTSE 100 index have operations around the world, foreign exchanges can give a route into specific continents, regions or countries.
3) Hedge against a fall in sterling
Overseas shares will usually be priced in US dollars, euros or another foreign currency. If the value of the pound falls, the worth of shares valued in other currencies will rise in sterling terms. This can balance out any losses in the value of UK-based shares.
Disadvantages
1) Currency risk
It is harder to keep track of how your investments are faring when they are priced in a foreign currency. And when sterling is strong, the value of overseas shares falls correspondingly.
2) Harder to understand fully
Unless you live in a country, or at least visit it regularly, it is harder to fully comprehend what is going on there.
3) Harder to find information
Apart from the Financial Times, UK newspapers give only spasmodic coverage to foreign companies as investments, and generally only the largest ones at that.
4) Different laws and customs
Stock exchanges in different jurisdictions may play by different rules. Make sure you invest where the rule of law prevails. You may need to fill in extra paperwork, such as a W8-Ben form to confirm you are not liable to pay tax in the United States.
Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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