How to Trade on the London Stock Exchange

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Contributor, Benzinga
April 5, 2021

The London Stock Exchange is the 7th largest globally and has a market cap of $3.6 trillion. Depending on your physical location, there’s a good chance that you can trade on the London Stock Exchange if you choose the right online broker.

When you buy foreign stocks, knowing how to trade is just as important as choosing the right broker. 

Main Takeaways: Trading on the LSE

  • Method 1: Open an account with an international broker like Interactive Brokers.
  • Method 2: Get an account with a foreign stock broker.
  • Method 3: Buy LSE stocks with American depositary receipts (ADRs).
  • Method 4: Trade LSE shares through contracts for differences (CFDs).

Overview: Trading on the LSE

One of the world’s first stock exchanges, the London Stock Exchange has a rich history that dates back to 1571 — the Royal Exchange.

In 1986, deregulation of financial markets occurred in the U.K. Commonly called the “Big Bang,” this shift abolished fixed commissions and the Exchange switched over to electronic screen trading, thereby doing away with the traditional “open outcry” system. In 2004, the Royal Exchange moved into a new building after the old Exchange Tower facility became obsolete due to the Big Bang. In 2007, the London Stock Exchange Group was born after the merger of the LSE with the Borsa Italiana. 

The LSE’s divisions include:

  • Main Market: This is where the U.K.’s largest and best-known companies’ stocks trade. As of May 2019, the Main Market consists of 939 U.K. companies and 219 international companies for a total of 1,158 stocks with a total capitalization of £3.717 trillion. 
  • Alternative Investment Market (AIM): Launched in 1995, AIM has become the world’s most successful growth market, with more than 3,500 companies listed. This international market for smaller and growing companies includes businesses ranging from early stage to venture capital financing as well as more established companies.  
  • Professional Securities Market: This market enables firms to raise capital by listing specialist securities such as depositary and debt receipts.

The LSE’s Turquoise Derivatives (TQ) platform allows you to trade equities and debt instruments, as well as derivatives on Norwegian stocks and indices, short term interest rate (STIR) futures like three-month Euribor and Sterling futures. Long-term interest rate (LTIR) futures, such as the Bund and Long Gilt contracts, are also available for trading. 

Method 1: Open an Account with an International Broker 

The easiest way to access stocks traded on the London Stock Exchange involves getting an international broker with representation on the LSE and the ability to execute trades for its customers on the Exchange. Regardless of where in the world you may be, you can open an account with Interactive Brokers as long as you have a sufficient minimum deposit. 

One of the leading online international brokers, Interactive Brokers holds a membership on the LSE, has an office in the U.K. and provides traders with one of the best trading platforms in the business, as well as great margin rates and low commissions. Through the LSE’s International Order Book (IOB), Interactive Brokers gives traders around the world access to trade global depositary receipts (GDRs) secured on LSE stocks.

You can also buy LSE-listed stocks if you live in the U.S. using American depositary receipts (ADRs) listed on U.S. stock exchanges through Interactive Brokers. Your selection of ADRs may be limited to larger U.K. companies if they are listed on the New York Stock Exchange (NYSE).  

Most of the GDRs for LSE stocks available at Interactive Brokers can be purchased directly with U.S. dollars, although some GDRs may require you to have EUR or GBP to purchase them. You can open and maintain your account with multiple currencies at Interactive Brokers, which can make trading in foreign stocks easier. Other reputable brokers that give clients access to foreign stock markets include Fidelity and Charles Schwab. 

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Method 2: Get a Foreign Stock Broker

Many excellent online brokers have their base in the U.K. and have full memberships at the LSE. If you live outside of the United States, you probably won’t have a problem finding a U.K.-based stockbroker to buy shares on the LSE. However, if you’re a U.S. resident, finding a foreign-based stockbroker with access to the LSE that will accept you as a client might be a bit more challenging. 

The U.S. government only currently prohibits U.S. citizens from sending money to Cuba, North Korea, Syria and Iran, so as long as you declare foreign accounts and pay taxes, the U.S. government doesn’t really care where you send your money. The problem arises with stockbrokers based outside of the U.S. that refuse to take U.S. clients, often due to the costs and regulatory requirements involved. 

Due to the U.S. Securities and Exchange Commission’s (SEC) Securities Act of 1933, financial institutions not registered or regulated by the SEC are prohibited from contacting U.S. investors and soliciting investment from them. 

Rather than registering with the SEC and submitting to its strict regulation requirements, the vast majority of online brokers and foreign banks take the easier approach of simply prohibiting U.S. residents from opening accounts. A few exceptions can be found, however, such as Denmark-based Saxo Bank and Switzerland-based Swissquote

Method 3: Buy LSE Stocks with U.S. ADRs

While U.K. residents can deal LSE stocks via their local stockbrokers, U.S. residents can get LSE stocks that involve using your regular U.S. broker to buy LSE shares traded as ADRs; they’re foreign shares held in trust by a U.S. based bank. 

This method lets you basically trade most large-cap LSE shares, like Lloyds Bank, BP or GlaxoSmithKline, which are considered “sponsored” due to their listing on a major exchange like the NYSE or NASDAQ. 

The U.S. over-the-counter (OTC) market also allows for trading in lower-priced LSE shares. LSE stocks that don’t trade as ADRs on a major exchange, generally trade over the counter and are considered “unsponsored.” These stocks can be found on what used to be known as the “pink sheets,” which can be accessed through the Over the Counter Bulletin Board (OTCQX). 

LSE stock ADRs can be traded just like any listed or over the counter stock and can be accessed through any reputable U.S.-based stockbroker, including brokers that offer free stock trading such as Robinhood.      

Method 4: Trade LSE Shares Through CFDs

A contract for difference (CFD) is a derivative product that lets you trade financial instruments without having to own the underlying assets or shares. CFDs can also allow you to go long or short a stock index, such as the Financial Times Stock Exchange (FTSE) index, or a particular company’s shares listed on the LSE.  

CFDs offer certain advantages to traders through the popular MetaTrader 4 trading platform that supports automated trading. Also, if you are based in the U.K., another advantage of CFD trading is that you aren’t liable for the usual stamp duty of 0.5%, which you would incur if you purchased traditional shares. Also, you can access a wide variety of tradable assets through CFDs that are not available through traditional stock brokers. U.K. brokers that offer CFD trading include IG, AVA Trade, City Index and Plus500. 

The SEC requires that trading in instruments like CFDs only be done on a regulated exchange, although no U.S. exchange currently lists CFDs. Some foreign brokers that accept U.S.-based clients offer CFD trading. 

For example, social trading platform Zulutrade allows U.S. traders access to CFD trading through 4 U.S.-based forex brokers: FXCM, FXDD, and FXSolutions. Other international brokers that may accept U.S. clients for CFD trading include Oanda, EasyForex and Global Futures. 

Final Thoughts on Trading on the LSE

Though U.K. traders should have no problem buying LSE listed stocks via a local broker, that might present a challenge if you’re based in the United States. Using a broker such as Interactive Brokers or a Charles Schwab Global Account might offer the best solution for U.S.-based traders. 

Coming up with Interactive Brokers’ $10,000 minimum deposit might be difficult for less affluent traders. Charles Schwab requires an even larger minimum deposit of $25,000 for a Schwab One International Account that would allow you to buy shares directly from the LSE at a high commission cost. 

Although opening an account with a foreign or CFD broker may be available to you, a better option for U.S. investors usually involves buying ADRs on LSE stocks through a regular brokerage account. Buying ADRs would only cost you the amount of the price of the shares and a $4.95 commission using a Schwab account. 

You might even be able to use a commission-free account like Webull or Robinhood to purchase ADRs. Keep in mind that not all LSE stocks are available as ADRs.