Yahoo Finance How to choose a broker to trade in US stocks
At Stockopedia we recently expanded our coverage to include US markets. As part of our guide to Getting Started in US Shares, we investigated some of the international brokerage options that are on offer to UK investors. What we found was a range of services and fee structures that varies wildly. So before diving in to US markets, it pays to check that your broker actually provides a service that suits your needs.
Does your broker offer online dealing?
Remember, a huge part of successful investing is keeping the costs low. Some people love the sound of an opinionated, portly fellow at the other end of a phone line before they buy their shares, but in these austere times we really ought to do away with such luxuries.
The advent of online execution-only (XO) dealing has made the cost of trading shares super-cheap - and all at the click of a mouse. But beware, many stockbrokers do not provide online share dealing for US and international stock markets. They will suck you in with cheap UK share dealing and fleece you as your itchy feet take over.
Insist on low cost online dealing in all the markets covered by your broker. Our research suggests this excludes a lot of the full service old-school British brokers like Killik & Co, Charles Stanley, Daniel Stewart, Redmayne Bentley etc, in favour of larger or international players like Saxo Bank, TD Waterhouse, Hargreaves Lansdown, iDealing and Barclays.
Does your broker charge low commission?
Standard online commissions on US share trades are usually in line with those offered for UK shares but they do vary widely between brokers depending on the frequency of your trading.
Commission for XO dealing starts from around £9.95 (AJ Bell) up to £17.50 (TD Direct Investing), with discounts available for frequent trading. Don't be reeled in by cheap frequent-trader rates though - they may start at £4.95 per deal but it's unlikely you'll trade enough to qualify for them.
Does your broker charge low forex rates?
It may seem obvious, but you can’t buy a US stock unless you have some US dollars! On most occasions, brokers will convert your hard earned pounds into dollars behind the scenes and charge you a variable rate of commission. In the case of Crest Depository Interests (CDIs) or shares bought via market makers, forex fees can even be bundled together with commission charges and hidden from view.
Research by Stockopedia has found wide variations in the currency exchange fees charged by some of the UK’s most popular brokers. TD Direct Investing, which offers a comprehensive foreign dealing service, is one of the most expensive, charging up to 2% on forex. By comparison, low cost international firms like Interactive Brokers charge next to nothing on forex. As part of its stockbroking service, IG will convert currencies at the time of execution based on the best available bid / offer exchange rates, plus a spread of 0.3%.
Apart from shopping around for low forex rates, high fees can be mitigated by using multi-currency brokerage accounts, if available. They can help keep ongoing currency conversions to a minimum by allowing investors to hold and trade with US dollars. Alternatively, low cost brokers with low forex fees can be found if you're prepared to compromise on service. Small execution-only broker The Share Centre has low commission and forex rates but only offers trading in CDIs and limited trading hours during the day.
Does your broker offer a $$ cash balance?
This is an important but subtle point. Some platforms don't actually allow you to hold US dollars in your account - they only let you hold sterling. This has rather expensive consequences.
When you purchase a US share, for example Google, all brokers have to convert the necessary £ from your cash balance into $ to buy the shares. But if you decide to sell Google to buy Apple what do you think happens?
Sensible brokerage accounts will make the sale, receiving the dollars which you can use immediately to buy Apple directly. But some, notably Halifax Share Dealing and Hargreaves Lansdown, don't let you hold a dollar cash balance! So on selling Google, the dollars received are swept into sterling (at up to 1.7% forex rates), before being reconverted back into dollars to purchase Apple (again at up to 1.7% forex rates). You are effectively charged for forex twice.
Another problem with sterling-denominated brokerage accounts involves dividends. Be aware that dividends paid in dollars to a sterling account will incur forex charges - which makes this type of arrangement even more unappealing.
For international dealing you really should insist on being able to hold foreign currency as cash - it will save you so much money on your ongoing US transactions. International firms like TD Direct Investing and Saxo Bank will let you do this, as will some full service brokers.
Can your broker help you reduce currency risk?
Buying a US share means taking ownership of a US$ denominated asset. It also means that part of your investment allocation (however small) is exposed to any shifts in the underlying exchange rate between the pound and the dollar. In other words, you can gain or lose even if the share price doesn’t move.
Historically, the dollar/pound exchange rate (known as ‘cable’ by forex dealers) has been less volatile than share prices, although in 2008 the pound did move 30% against the dollar. For those investors that are uncomfortable with that risks, there are ways to ‘hedge’ the exposure, including:
- Making a spot FX trade
- Exchange listed Futures and Options
- Contracts for Difference (CFD)
- Spread betting
Not all UK brokers offer these hedging tools through their platforms. If you are concerned about currency rate risk enquire with your broker about the options available to you - or look further afield.
Does your broker cover all US stocks?
Most of the main UK brokers offer trading in all the stocks covered on the big US exchanges - the NYSE and Nasdaq. In the case of the less covered ‘over the counter’ or Pink Sheets stocks some brokers offer a more limited service. If you want to trade Pink Sheets or OTC stocks in your SIPP it’s worth asking about this.
In addition, it’s important to know whether your brokers deals direct in all US stocks or in Crest Depository Interests (CDIs). Crest, the UK share settlement system, does not deal with international stocks so CDIs were created as a way of packaging individual US shares as a sterling equivalent. Not all US shares are available as CDIs. They are traded over the counter through market makers, which means that the quoted price of the underlying security might be slightly different to its CDI equivalent.
Does your broker deal in US trading hours?
The New York Stock Exchange is open for trading on weekdays from 9.30am to 4.00pm Eastern Standard Time, or 2.30pm - 9.00pm GMT. While many UK brokers (such as Hargreaves Lansdown and TD Direct Investing) allow investors to trade whenever the market is open, others limit trading to UK hours only. For instance, clients of UK brokers like AJ Bell and The Share Centre will find that they can only trade US shares from when it opens at 2.30pm to the UK close at 4.30pm GMT - not ideal for those with a US trading fixation.
One of the best sources of detailed information on the brokerage options for international investing is The International Investor.
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