A number of different options exist for buying foreign stocks versus domestic stocks if you’re based in the United States. Perhaps the easiest way to purchase foreign stocks is through American depositary receipts (ADRs), which basically give you access to certain foreign stocks held on deposit for U.S. investors.
ADRs are traded on major U.S. exchanges like the New York Stock Exchange (NYSE) and the NASDAQ.
Another lesser-known method of investing in foreign stocks are through global depositary receipts (GDRs), which are like ADRs but are instead deposited with foreign banks and available to investors worldwide. GDRs are mostly used by Europeans and the stocks on deposit are usually located in Brussels or Luxembourg.
You can also buy exchange-traded funds (ETFs) or mutual funds whose managers specialize in foreign stocks or purchase foreign stocks directly through your broker if they have an affiliate in the stock’s country of origin.
In the case of a stock that’s only available on a foreign stock exchange, you would generally need to open an account with a broker in that country to purchase the stock.
Main Takeaways: How You Can Buy Foreign Stocks
- Determine whether you’ll buy the foreign stocks through an international broker or online stock broker.
- Pick a stockbroker that fits your needs and open an account.
- Practice trading and develop a strategy through a simulator or demo account.
- Start live trading the stocks of your choice.
Buying Foreign Stocks: What to Know Before You Buy
It’s a good idea to have a thorough understanding of the risks involved with foreign investments before you invest in foreign stocks. For starters, each country has its own regulations pertaining to both stock issuance and foreign investors, which can affect your investments and your foreign accounts.
Other considerations, such as getting timely and accurate information on the value of your investments, may not be as readily available in foreign countries as in the U.S. Foreign tax laws and the U.S. taxation of your trading profits should also be taken into consideration before you plunge into foreign stocks.
Furthermore, the economic condition and geopolitical events that affect the country where you plan to buy stocks could significantly impact such foreign investments. Last, but certainly not least, the foreign nation’s currency and the level of its exchange rate versus the U.S. dollar will directly affect the value of your investments in that country.
Step #1: Determine How You’ll Buy Foreign Stocks
As mentioned above, you can invest in foreign stocks through a variety of methods. Mutual funds, exchange traded funds (ETFs), American depositary receipts (ADRs) and global depositary receipts (GDRs) are options, as is buying the stock of transnational corporations like Coca-Cola, for example.
Depending on your choice of broker, you can also sometimes invest directly in foreign stocks. Each method of investing has its own risk profile and commission structure, so pick the method that suits your needs.
ADRs and GDRs
This method of buying foreign stocks can be done through your existing stock brokerage account. Foreign stocks trading as ADRs and GDRs are generally sponsored in whole or in part by the listing company.
They are typically listed on major U.S. stock exchanges or in the over-the-counter (OTC) market. The 3 levels of ADRs are listed below.
The level I listing is for sponsored ADRs that require the least regulatory oversight and compliance. The only requirement for listing ADRs at this level is an F-6 Securities and Exchange (SEC) form with all the pertinent information on the foreign company.
Since this is the lowest level of ADR permitted to trade in the United States, stocks listed at this level can only trade in the OTC market.
In addition to the SEC F-6 Form, the second ADR level requires SEC Form 20-F to be filed, along with annual financial reports using either international financial reporting standards or the generally accepted accounting principles (GAAP) standard.
Level II ADRs can be listed on major U.S. exchanges, such as the New York Stock Exchange or the NASDAQ exchange without having to issue a new public offering.
This ADR level has all of the requirements of the first 2 levels, but companies listed at this level can also raise money in the U.S. through a public stock offering. The extra step requires that the company file SEC Form F-1.
Mutual Funds and ETFs
You can also indirectly buy foreign stocks through mutual funds and ETFs that specialize in investing in foreign stocks from all over the world. The advantage of buying foreign stocks through ETFs and mutual funds is that you can invest through your normal stockbroker without the need to open new accounts or obtain the stock through international brokers.
Another major advantage of ETFs is that the fund’s expert stock picker(s) will research and choose what to buy and diversify the portfolio to maximize returns so you don’t have to.
Foreign Brokerage Account
A more complicated method of acquiring foreign stocks requires opening an account with a foreign broker and purchasing the stock you are interested in directly in the country of origin. Find a broker in the country where you want to buy stocks, open your account(s), place your order and receive your stock in your foreign account.
While this may sound simple enough, take into account any restrictions on foreign investments in the country you plan to buy stock. You should also factor in any additional costs of doing business abroad.
Be sure to understand the tax implications both abroad and domestically of this investment plan, in addition to how you can pay for stock and receive funds from your foreign account.
Another important issue is the country’s currency and the exchange rate versus your home currency. This could either favor your foreign stock transactions or cost you money, depending on how that exchange rate moves.
Step #2: Pick a Broker
Knowing how to buy foreign stocks is just as important as selecting the right broker, so once you’ve decided on the method you plan to use to buy foreign stocks, pick a reputable broker and open an account to facilitate your stock purchases.
Many good stockbrokers have access to foreign stock exchanges and can execute orders for ADRs, GDRs, ETFs and mutual funds. You’ll be able to find some of the top brokers for buying foreign stocks listed below.
Interactive Brokers has some of the best resources for buying international stocks of any online brokerage.
In addition to a multi-currency account where you can make deposits and withdrawals in different currencies, Interactive Brokers gives you access to just about every major financial market in the world.
Not only can you trade foreign stocks through Interactive Brokers, but you can also trade in multiple assets on more than 120 different markets worldwide.
Interactive Brokers has offices in the U.S, Canada, Switzerland, Hong Kong, Japan, India, China, Estonia, Hungary, Australia, the U.K. and Russia.
Interactive Brokers either has memberships or is affiliated with exchanges in many locations where you would not normally be able to trade.
For example, through Interactive Brokers’ Hong Kong Stock Exchange membership, you can buy Chinese stocks on the Shanghai Stock Exchange, thanks to a mutual market access program called Hong Kong Stock Connect.
When some financial markets are not readily available, like the Johannesburg Stock Exchange in South Africa, Interactive Brokers offers Contracts for Difference (CFDs).
In addition to Interactive Brokers offering ADRs, GDRs and ETFs, you can also invest in mutual funds that specialize in making investments in major and emerging markets. Commissions at Interactive Brokers can be tiered or fixed, and foreign stock commissions vary depending on the venue.
Fidelity is known for its impressive financial research.
Fidelity Investments offers an international stock trading feature to all of its non-retirement brokerage accounts.
Fidelity provides a trading service in 25 countries using either U.S. dollars or the local currency as your accounting currency.
The broker also provides a foreign exchange trading service in 16 different national currencies.
You can use this to take advantage of exchange rate movements.
Fidelity offers trading in mutual funds, ETFs, options, fixed income securities and bonds and certificates of deposit (CDs).
You can also trade in retirement and IRA accounts, managed accounts, annuities, life insurance and long-term care.
Commissions for international stock trades vary and are charged by foreign markets in their local currency.
Not that broker-assisted trades involve an additional charge.
You’ll get access to 12 foreign stock markets with Charles Schwab.
These include the United Kingdom, Australia, Japan, Belgium, Canada, Finland, France, Germany, Hong Kong, Italy, the Netherlands and Norway.
With the Schwab Global Account, you can trade those foreign stock markets in their local currencies.
Although you can purchase foreign securities in the basic Schwab One account, you’re obligated to trade and settle trades in U.S. dollars.
Rates for stock trades vary, and an extra fee applies if the trade is assisted by a broker. Rates are quoted in the national currency where the trade takes place.
For example, fees are AU$32 per trade for Australian stocks, €19 for stocks in all EU countries, CA$14 for Canadian stocks, HK$250 for Hong Kong stocks, ¥2,000 for Japanese stocks, kr160 for Norwegian stocks and £9 for U.K. stock trades.
In addition, you must pay foreign currency conversion fees that range from 1.0% for $100,000 to 0.20% for $1 million or more. Commissions for ADRs traded domestically are the normal $4.95, while the commission on foreign OTC stocks is $54.95. All Schwab broker-assisted trades carry an extra fee that varies according to the market involved.
Step #3: Practice Trading and Develop a Strategy
The broker you choose will ideally offer a demo or simulator account to let you try out its platform and to test services before funding an account. This can be very helpful in figuring out whether you chose the right broker or not.
You may probably also benefit from taking some time to try out your trading strategy or strategies in a demo account ahead of jumping right into trading foreign stock markets.
A demo account can also be used to backtest a strategy, which could save you time and money in the long run and give you a sense of what sort of returns to expect from that strategy.
Step #4: Start Live Trading
Once you’ve decided on a broker and have favorably tested a strategy, open your live trading account. Use your preferred trading strategy to buy foreign stocks, either directly from the country where the stock trades, or through an ADR, GDR, ETF or mutual fund.
Do some initial research to choose a stock and some technical analysis to identify entry and exit levels in the stocks you plan to trade to improve your chances of success.
All brokers mentioned in this article provide clients with an excellent trading platform and considerable research resources, which will give you an edge once you start live trading.
Are Foreign Stocks for You?
Thanks to the international access provided by the online brokers mentioned above like Interactive Brokers, you can now trade in multiple foreign markets using a number of different currencies without having to open an account abroad.
Trading international stocks involves familiarity with the local market, and the more informed you are about the particular market, the more profitable you’re likely to be. Furthermore, in addition to paying higher commission costs for foreign stock trades, you might also have to pay additional taxes in the country where you trade if you’ve opened an account with a local broker.
Trading foreign stocks may not be for everyone, but if you are willing to do the research, trading international stocks could be lucrative and provide a vast array of additional opportunities.