Some private investors may tend to invest in domestic markets for many reasons, one being home country bias. However, entering international markets can potentially benefit your portfolio. This article discusses investing in foreign shares, including the advantages, risks, and tax implications and costs, and provides information about investing internationally with DEGIRO.
We need first need to explain why one may want to invest on foreign exchanges and buy US shares or even Hong Kong shares. Whether you are thinking of investing in well-known American companies or niche European ones, below are some benefits of international investment:
Buying foreign stocks is an easy way to help diversify your portfolio. Let’s say your portfolio only consists of domestic shares. Then, the economy in your country hypothetically experiences a crash, having a significant negative impact on your portfolio. If your portfolio included stocks from various countries, perhaps also nominated in different foreign currencies, this type of investment risk could be more well-spread.
However, true diversification is not achieved by only investing in foreign shares. Investing in companies across different sectors and industries as well as investing in various financial products, such as bonds and ETFs, can also help to diversify your portfolio. This video explains diversification in more detail and its importance in investing.
Entering international markets may also allow you to participate in the growth of economies. It means that by entering any stock market that is still developing, you will have a chance to stake in its growth and possibly profit in the future.
Lastly, investing in international markets gives you the possibility to buy and sell wider range of products rather being limited to stocks that trade on your home exchange. Some countries may also offer different investment opportunities. For example, cannabis stocks are available on US and Canadian exchanges due to legalisation of cannabis in these countries.
In order to invest in stocks in general, you typically need to open a share dealing account with a broker, like DEGIRO. If you are interested in investing in international stocks, it is important to first see which foreign exchanges and investment options a broker has. DEGIRO provides you access to over 50 exchanges across 30 countries, so you don’t have to worry about that.
After opening your account, you can invest in foreign stocks directly or indirectly.
Directly investing in foreign stocks entails buying stocks of a foreign country. With this, you gain part ownership of a company that is based outside of your home country.
You can also indirectly invest in foreign shares via ETFs or other investment funds. With an ETF or investment fund, you do not directly own part of a company. Rather, these products track the performance of a basket of securities of which can include fractions of shares of foreign companies.
Whether you are investing in domestic or foreign shares, there is always risk involved. Some stock markets and foreign companies can be riskier than others. High risk may lead to great rewards but also significant losses. When thinking about investing in foreign markets, it is important to think about your personal investment plan and risk tolerance. Below are some risks to consider:
International shares can be nominated in a foreign currency and therefore currency fluctuations should be taken into account. Exchange rates can negatively impact your investments, but can also positively impact them when exchange rates are favourable.
If you choose to buy foreign shares, there can be political risk whereby a country’s political climate could result in unforeseen losses.
Economic risk also can arise when you buy shares internationally. If a country’s economy is unstable, this can have a negative impact on your investments and returns compared to a country with a stronger, less volatile economy.
Securities may trade less frequently depending on the size of the foreign market. If there is less liquidity, it may be more difficult to buy or sell or take a longer time for your order(s) to be executed.
When entering international markets, there are also tax implications to consider. If you have bought a stock or if a company has paid a dividend, taxes need to be paid accordingly. Taxes can vary from country to country. For example, there is transaction tax of 0.5% when purchasing UK based stocks called Stamp Duty.
Withholding tax, on the other hand, is paid on income such as dividends or coupons. It is paid to the tax authorities of the resident country of the paying organisation (source country) directly at the pay-out of the income. Withholding tax rates also vary depending on the country and some countries may have tax treaties in place to avoid double taxation on the same income.
For example, if a tax treaty exists between the US and your tax residence country, filling out the W-8BEN form can provide relief at source on US source income.
With DEGIRO, a specific list of products is within the scope of this benefit and you as a client must meet certain conditions. More information about this and taxation in general can be found in our Tax FAQ. Please note: as DEGIRO is an execution-only broker, we do not provide tax services of any kind.
As mentioned, with a DEGIRO account, you have access to more than 50 exchanges, across 30 countries. In addition to many European exchanges, you can also trade on North American exchanges as well as exchanges in Asia and Oceania. A complete overview can be found on our Products & Markets page.
We do not currently offer price feeds for some exchanges including (but not limited to): Australia, Canada, Hong Kong, Japan and Singapore. For these, you will only see the end of day prices. If a live price feed is not available, you can still place orders but may want to find price information elsewhere online.
When investing internationally, you should keep time zones in mind. Some exchanges are open at different times or could be closed due to a local holiday. We therefore made an overview of exchange opening hours and holidays so you can easily tell when an exchange is open. If you place an order when an exchange is not open, your order is retained and sent to the exchange upon the market reopen.
Fees can have a substantial impact on your returns, so it is important to take this into consideration when opening an account for investing.
We offer low fees for both domestic and international investment. For example, buying and selling on the New York Stock Exchange costs €0.50 + USD 0.004 per share. Our fees vary depending on the exchange. An overview can be found on our Fees page. It could be the case that a stock is listed on more than one exchange. When buying shares that are listed on more than one exchange, keep in mind that depending on the exchange, fees vary, trading volumes could be different and share prices could be nominated in a foreign currency.
Transactions in foreign currency can be handled in two ways; using the AutoFX option or holding foreign funds manually. AutoFX is the default option and we automatically convert the required amount. If you sell a stock, proceeds will also be converted back to your base currency. With Manual currency holding, you have the possibility to manually convert funds and hold foreign currency on your account. If you frequently trade in foreign currencies, the Manual function could be a more cost-effective option. An overview of the fees for both options can be found on our Fees page.
The information in this article is not written for advisory purposes, nor does it intend to recommend any investments. Investing involves risks. You can lose (a part of) your deposit. We advise you to only invest in financial products that match your knowledge and experience.