As ARM Holdings starts to dot the final I’s and cross the final T’s on its New York initial public offer (IPO), there are likely to be many UK-based investors that are planning on adding the former FTSE 100 constituent to their share portfolio.
Despite the UK stock market long being touted as undervalued and even before the trend of UK blue chips crossing the Atlantic, UK investors have increasingly been looking overseas, mostly to the US, in recent years.
Whether it was chicken or egg, the ease of doing so via online investment platforms means that the process is little different to investing in London-listed shares.
Easy does it?
All brokers and investment platforms offer direct market access to global stocks and many of their customers will have purchased US or other international stocks in their time – they’d have missed out on some major gains in recent years if they had not.
It seems by the most-bought stocks and most popular investment tables for the major platforms that US stocks are at the top of many investors’ wishlists and watchlists.
Tesla Inc (NASDAQ:TSLA) was the most bought share on one of the top-three largest platforms in July, and was in the top five of the two other platforms for the past week (and the most sold), with NVIDIA Corporation (NASDAQ:NVDA) and Apple Inc (NASDAQ:AAPL) in the top 20 of one, and Fisker Inc (NYSE:FSR), Palantir Technologies Inc (NYSE:PLTR) and Rivian Automotive Inc (NASDAQ:RIVN) in the other.
The average male customer has 8% of their directly held stocks in US shares on the Interactive Investor (ii) platform, while the average female had 6% US, as of the end of June. It is likely that exposure to the US is higher when collective investments such as trusts, funds and ETFs are taken into account.
The most popular US trades from the past session on ii were led by Tesla and NVIDIA and also included Microsoft Corporation (NASDAQ:MSFT), Meta Platforms Inc (NASDAQ:FB) and Moderna Inc.
Widening your options
For UK investors, obviously one of the benefits of being able to invest in US stocks as well as domestically quoted ones is it widens the array of options you have to choose from.
Second, most of the largest quoted companies are listed on the New York Stock Exchange or Nasdaq, including many well-known names that have rocketed up several hundred percent, some while the rest of the market has been treading water or sliding lower.
It could also help diversify a portfolio, both geographically and by providing access to sectors that are not well represented in London, such as globally growing technology companies or major carmakers.
Forms to fill in, CDIs
In order to trade North American stocks, UK investors need to sign a W-8BEN form, which is relevant tax form that confirms you are not a US tax resident.
This allows your platform or broker to claim a US tax reduction on any dividends and interest from US shares, reducing tax rates on US shares from 30% to 15%, or to 0% if held in a SIPP. Almost all brokers will have a means for you to do this online.
UK investors will generally buy shares in the main US and Canadian markets via vehicles called CDIs, or CREST Depository Interest, which are UK investments that represent a security listed on an exchange outside the UK.
While these CDIs can easily be bought and sold in the UK, they do not give you voting rights with the company like normal shareholders, even though the underlying investment does have voting rights.
While the majority of providers use CDIs, ii and Freetrade are among the platforms that do not.
Different options
The number of available overseas shares varies between brokers, with HL topping 4,420, while ii has almost 3,000, while a basic commission-free account with Freetrade has 1,800 UK and US stocks (its non-free accounts offer over 6,000 though).
With some US stocks costing one or more hundreds of dollars for an individual share, a small private investor might only be able to buy a handful of shares in their chosen company.
The trading hours are different too, with the US market not opening until after lunchtime in the UK and closing at 9pm GMT, but there are a few hours of crossover with London.
Impact of forex fluctuations on US holdings
“While not always obvious, changing FX rates can have significant implications for investment performance,” says Richard Hunter, ii’s head of markets.
“It might be the impact on company profits of doing business globally, or on dividends when converting dollar or euro-denominated payouts back to sterling.”
Imagine a £10,000 investment in a US stock that does not change price in a year, but the dollar has weakened from $1.27 to the pound to $1.35, this means converting your $12,700 investment back into sterling would see it worth £9,407.4 (12,700/1.35).
Or vice versa if the dollar strengthens, making your original investment worth more.
Indeed, as Susannah Streeter, head of money and markets at Hargreaves Lansdown, says, currency fluctuations can also work the other way.
“If a domestic market, like the UK for example, is suffering from a weak pound, holding US companies might help compensate but it will also depend on general market sentiment.”
Cost differences
While costs vary between brokers, the costs are likely to be the same at your broker whether you are buying UK or US stocks.
For example, the standard commission at Hargreaves Lansdown, the largest platform, is £11.95 per trade and a 1% forex conversion fee, while at AJ Bell it is £9.95 and 1%, and at Interactive investor is £5.99 (being cut to £3.99 from next month) under its fixed monthly subscription and 1.5% FX fee.
Broker IG offers £8 and a 0.5% FX fee, while the likes of Freetrade and the CMC Invest service from CMC Markets offer stock broking for free, only charging for forex conversion but both offering a more limited range of available shares.
A custody fee is also charged, either a set amount of a percentage depending on platform, for share investments held in a share dealing account or ISA at the end of each quarter, less commissions paid during the quarter.