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A diversified portfolio is the key to making money in stock in the long term, but it’s hard to truly diversify your money if you never leave your home country. The London Stock Exchange (LSE) has a wide range of offerings for investors but represents less than 4% of the total global stock market. Want to know where nearly 50% of global stocks trade? On the NYSE and Nasdaq in the United States.
Thankfully, trading U.S. stocks from outside the U.S. has never been easier. If you live in the U.K., you can add exposure to the strongest U.S. firms like Apple, Amazon, JPMorgan and hosts of other large banks, tech giants, or up-and-coming startups. U.S. stocks have provided tremendous growth for investors over the last century, especially in the last 10 years. And while past performance is no barometer of future performance, the U.S. does have the demographics and business climate necessary for growth.
Of course, buying U.S. stocks from inside the United Kingdom is not without inconvenience — or expenses. Buying foreign shares opens you up to different sorts of fees, taxes, and yes, investment risks. In this article, we’ll examine the risks and rewards of investing in U.S. stocks and explain how you can gain exposure to U.S. firms from the comfort of your U.K. living room.
Step 1: Prepare for trading U.S. stocks.
Before jumping into the S&P 500 or Nasdaq 100, you’ll need to do a little homework. There are 3 main concerns for U.K. investors when it comes to trading in U.S. markets:
- Exchange rate
Investing in U.S. stocks will require some legwork. Before you get started, you’ll need to understand the different tax rules involved with foreign investment. If you want to trade U.S. shares from the U.K., one of the first things you need to do is file Form W-8BEN with the Internal Revenue Service (IRS). This form will prevent you from being overtaxed or double taxed since both the U.S. and U.K. authorities will be expecting a cut of your gains.
Another concern is exchange rates. Some brokers allow you to deposit foreign currencies, but most U.K. investors will need to deposit pounds and have them converted to U.S. dollars. Exchange rates can be volatile at times, which could eat into your trading profits. And of course, you’ll need to pay commissions and fees on your transactions.
Step 2: Review the stocks you want.
Once you’ve gotten your legal paperwork square away and can legally trade foreign shares in the U.K., it’s time to review the stocks you wish to purchase. The U.S. stock market is a vast landscape of businesses ranging from microcaps to large caps like Apple (NYSE: AAPL) with market caps over $1 trillion.
What kind of stocks do you want to invest in? Do you want to pick individual companies and attempt to beat the average or do you want to buy ETFs that offer broad exposure to U.S. equities? U.K. investors will have no difficulty researching these companies — you can look up the price, earnings and other data right here on Benzinga. Enter the stock symbol of the shares you’re interested in and research the data that matters to you. If you plan on trading short-term moves, technical indicators will prove more useful than debt levels or P/E ratios.
Step 3: Open an account with an international broker.
Paperwork filed? Check. Equity research completed? Check. Now it’s time to put your plan into action. You’ll need to open an account with a broker that deals with international shares. Called a share dealing account, these vehicles allow U.K. investors to trade actual U.S. shares on the markets. Additionally, trading accounts offering securities like contracts for difference (CFDs) can also provide exposure to U.S. companies.
Step 4: Buy your shares.
Once your international account is up and funded, you can locate your desired shares and purchase them. Buying foreign shares involves the same thought process as domestic ones — identify the stocks you want to purchase and use technical indicators to find a good entry point.
Trading Global Depository Receipts (GDRs) and American Depository Receipts (ADRs) is done the same way as your traditional share purchases. Use moving averages to locate support and resistance levels and buy shares at ideal entry points. When looking to exit your trade, use these support and resistance levels to close your position for maximum profit.
Step 5: Monitor your shares.
If you trade U.S. shares, ADRs or GDRs, you don’t need to track your investments minute by minute. American stocks can be volatile, but your trading plan and technical indicators will alert you if your investments move in a different direction. If you’re day trading, you probably need to monitor your stocks more closely since you don’t plan on holding any positions overnight.
If you’re trading CFDs, you can expect more volatility and will need to keep a closer eye on your account. CFDs are complex derivatives that are difficult for new traders to have success with. In fact, according to European regulators, 70%-80% of investors who trade CFD products will lose money.
Choosing the right broker is a crucial factor for successful investing. When buying international shares or CFDs, make sure your broker meets your needs in two key areas: fees and ease. Fees, meaning low overall costs of trading; and ease, meaning an intuitive platform, helpful customer service and a wide array of investment options.
Benefits of US Shares
- Best growth prospects: U.S. stocks are the envy of the global financial system. While a diversified international portfolio is necessary for proper risk management, U.S. shares should represent a large portion of your portfolio due to their excellent growth potential, encouraging demographics and conducive regulatory climate.
- Diversity: Investing just in your home country’s companies is a small-minded approach to investing. Even U.S. investors devote portions of their portfolio to Asian and European securities, so U.K. investors would be wise to diversify their portfolio with a position in U.S. equities. With over 7,000 publicly traded companies to choose from, U.S. stocks offer opportunities in nearly every sector and industry.
Cons of US Shares
- Fees: American investors have been spoiled by near-universal free trading. Most major U.S. brokers have completely dropped commissions on stock and ETF trading, but U.K. investors won’t be so lucky. Your international broker will likely charge a commission, currency exchange fee and other fees for things like inactivity.
- Taxes: Regulations are in place to avoid double taxation of U.K. investors who buy foreign shares, but you need to dot your I’s and cross your T’s. Missing paperwork or filing the wrong form could result in a major tax headache (that you won’t encounter if you stick to U.K. stocks).
- A different set of risks: Peter Lynch famously said, “Invest in what you know.” And while U.S. stocks provide tremendous opportunity, there are also different risks involved. U.K. investors may not be able to track U.S. companies as closely as their English counterparts. Additionally, altered trading hours and currency exchange rate risks are unique to foreign shares. Understanding these risks will help save you money in the long run.
Buying US Stocks is Worth the Legwork
Unlike domestic firms, U.K. investors must do their homework before buying U.S. shares. You’ll need to have the proper paperwork on file with the IRS, understand the companies you seek to own and know the risks and fees involved with foreign investment. It can be tedious and time-consuming, but investing in U.S. shares is well worth it. U.S. stocks have outperformed for more than a decade now and that trend has shown no signs of slowing down. Investment in U.S. stocks is a necessary component in any well-diversified portfolio.
Frequently Asked Questions
Can I trade U.S. penny stocks in the U.K.?
Yes, many CFD brokers offer exposure to penny stocks from both the U.S. and U.K.
Can I trade U.S. options from the U.K.?
U.S. options differ from European options because they can be executed at any time as long as the strike price has been reached. Most U.K. brokers won’t allow trading of U.S. options, but you can trade CFDs and get similar exposure.
Is trading tax-free in the U.K.?
No, you will need to pay taxes to the proper regulatory authorities and get Form W-8BEN on file with the US Internal Revenue Service to avoid getting slapped with extra taxation.
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