The Australian market is just 2% of global trade. That’s a small piece of the pie if you are looking for a diversity of investments. That’s not to say there aren’t gems or stable stocks to invest in locally, however, when trading global exchanges, the world is your liquid commodities.
In this article
- How to buy international shares?
- The difference between trading Australian and international
- Types of investments
- Considerations
- Risks
- Benefits
How to buy international shares
The number of Australian investors piling into international stocks is on the rise. Last year, numbers surged. nabtrade reported that Aussie investors held more Tesla shares than local blue chips.
“The trend of buying direct international shares has been growing at a much higher rate than domestic shares for the last five years, but investors still hold the bulk of their wealth in Australian equities,” said nabtrade director of investing behaviour Gemma Dale.
“To see an international stock, particularly a newer, more volatile company like Tesla, just outside the top 10 holdings on nabtrade is extraordinary.”
So with surging numbers, how easy is it to invest in international stocks.
Pretty easy, in fact. You just need a broker and a good sense of your trading plan.
Find a broker
The first thing you need to do is compare brokers: what are their costs and commissions (flat rate, percentage rate, sign up fees, foreign exchange fees or no fees), what access do they have to international markets including the NASDAQ or NYSE and LSE or European and Asian markets, how quickly can they execute a trade and do they have a buffer – a percentage of the order value added to the cost of the order that protects the provider from currency fluctuations while the trade clears.
This ensures no money is lost on routine trades. What research tools do they offer, including real-time market information and do you need to pay extra to access these tools? Do they have a mobile app and what kind of accessibility do they have if you need to contact them? Finally, can you set a limit on the amount of money you trade?
Finding a broker isn’t just a matter of picking up the phone and ringing the first one you saw on Google, or choosing one of the myriad online brokers that now exist. Each broker offers something different, and you need to do as much due diligence into your broker as you would your stock picking.
Open your account
Once you have found a broker, you can open your account. If you have chosen your bank to trade through, you can usually set up a trading account via their online portal.
There are eligibility criteria to consider including being 18 or over, being an Australian resident and having a mobile number. You will also need to provide personal photographic identification (drivers’ license, passport and/or proof of age card) and an Australian business number (ABN) and/or tax file number (TFN) if applicable.
You need to specify whether you are trading as an individual, as a company or organisation or on behalf of a trust and you will need to share your income details to meet tax implications.
Now, it’s time to set up the account, including linking your bank account and setting up your cash management account to start trading.
Put money into your account
The first rule of trading: Don’t trade what you can’t afford to lose.
You’ll need funds in your cash management account to trade. Note that any trade you make must take into account any associated fees, including brokers fees and currency conversion fees, so have enough in the account to cover all facets of the trade.
It may take a few days to load the funds into the account, so you shouldn’t expect to be trading the minute you open your account.
Once you do start, you should see a dashboard, highlighting current share prices and changes over time and options to buy, sell or research. Tutorials are also a good tool to use, if your broker provides them.
Find the shares you want to trade
Most trading platforms will give you access to a large range of global exchanges. You just need to find the stocks you want to invest in, within these exchanges and follow the prompts to buy.
When looking at investing in international shares, note:
You can invest directly in shares listed overseas stocks such as Apple or Amazon by using a broker with an international share trading platform. You can purchase a global-themed exchange traded fund (ETF) or managed fund. Or you can look into contracts for difference (CFDs), but these have inherent risks that are recommended for more seasoned traders.
The difference between trading Australian and international
Domestic trading
With domestic trading, you are trading on your local bourse. For Australians, this means the Australian Stock Exchange (ASX), National Stock Exchange (NSX) and Chi-X.
International trading
You can trade on any market in the world, at any time of the day, subject to local market hours. International markets give you access to big global brands that the ASX doesn’t include.
Of course, with greater opportunity, comes greater risk including fluctuating exchange rates, foreign policy and instability, more buyers of the stock you like and international tax implications.
Types of investments
So, you want to diversify your portfolio by buying international stocks.
That’s a great idea as many financial advisors recommend a 5% to 10% allocation for conservative investors, and up to 25% for aggressive investors.
Diversification into international markets gives investors exposure to the growth of other economies and are a healthy addition to any portfolio, but what are the types of investments you can make.
1. Foreign Direct Investing
There are two ways to buy foreign stocks directly: open a global account with a broker in your home country or open an account with a local broker in the target country.
Direct foreign investment comes with additional costs, tax implications, technical support and research requirements, currency conversions, and other factors. If you know what you are doing, it’s a great way to get into foreign markets.
2. Mutual Funds
For those who don’t want the hassle of direct investment, a mutual fund that focuses on international equities could be the go. These can be region or country-specific, aggressive or non-aggressive and active or a passive index fund tracking an overseas stock index. Again, fees could be restrictive.
3. Exchange-Traded Funds (ETFs)
ETFs are probably the safest way for retail investors to access international markets and stocks and also a great way to diversify your portfolio. A good ETF will give you a basket of stocks that you would otherwise have to choose individually.
You can choose from multiple markets, stocks within a particular industry, geographic regions etc…
Prominent ETF providers include Vanguard and VanEck. Before buying an international ETF, investors should consider costs and fees, liquidity, trading volumes, tax issues, and portfolio holdings.
4. New-age apps
The rise of retail trading has coincided with the rise of fintech trading apps. And there are plenty of them that offer access to foreign markets.
Apps to look out for include:
- eToro
- Superhero
- CMC Invest
- SelfWealth
- Think Markets
Considerations
We’ve touched on some of the considerations you might have before entering foreign markets. Your due diligence when considering foreign stocks is even more important and can take into account factors, you may not have previously thought of.
For instance, what is the country risk? That is to say, what is the geopolitical risk of the country which hosts the company you want to invest in? Avoid countries that are war torn or have economic worries, which could be a red flag.
What are the macro-economic factors?
Foreign exchange fluctuations are also a risk. How does the exchange compare to your home country's? Is the exchange rate a cause for concern?
Also, consider how volatile the stock is due to these above factors.
And don’t forget the transaction costs and tax implications — we can’t stress those points enough.
Risks
There are plenty of risks, but plenty of upsides as well. Let’s look at the risks first:
- Currency: how will your investment be affected by currency risks, and how does the currency compare to the Australian dollar?
- Political and regulatory risk: any foreign stock will be guided and affected by that country’s foreign policy, regulations and economic changes. Be aware of it all;
- Tax: as with Australian stocks, you will be taxed. However, tax implications may be vastly different from the Australian Tax Office. For instance, if investing in US stocks, you will need to complete a US Tax form as part of the application process, which is only valid for 3 years. If you qualify for Australian treaty benefits, you will be charged 15% tax on dividend proceeds. Without a valid form, you will be charged 30% on sale proceeds and dividends;
- Death and taxes: right?
- Market Risk: as with any shares, you will make a loss if you sell your shares at a lower price than what you purchased them for. Simple mathematics, but you also need to take into account fees; and
- Dividend Risk: dividends are never guaranteed and are at the company’s discretion. Do not rely on these.
Benefits
- Diversification: industries, funds, markets that are less common to Australian investors can be opened up;
- Capital gains: foreign investment can lead to capital gains, if buying low and selling high is how you make a profit;
- Dividends: look for a company that usually pays dividends and sit back to receive the regular payments; and
- High liquidity: high liquidity means supply and demand and easily traded international stocks.