Smart Investor: Earning It, January 2013
1 January, 2013The toughest year in headhunting
1 January, 2013Smart Investor, January 2013
Ever feel you’re missing out?
Many Australian investors never venture further than the local stock market – it’s familiar, they know the companies, they can follow the market and they know where they stand with the tax.
But Australia accounts for only 2% of world stock markets. By definition, ignoring the rest of the world is to turn a blind eye to 98% of the opportunities in world stock markets. Moreover, Australia lacks any major stocks in several of the most important sectors in the world economy, such as technology, pharmaceuticals or the car industry.
But if you want to buy foreign shares, how do you do it?
Actually, it’s easier than ever. More and more brokers, both online and traditional, will allow you to buy foreign shares, and the number of markets you can access is increasing all the time.
For years, big brokers such as CommSec and E*Trade have allowed investors to buy shares on the US market, while the ASX had a close link for many years with Singapore Exchange (though it eventually axed it for lack of demand). More recently, brokers have started to develop separate accounts devoted to international trading.
CommSec, for example, now offers an international trading account that allows clients to trade on more than 30 global share markets, from the big names (New York Stock Exchange, Nasdaq, London Stock Exchange, Tokyo Stock Exchange) to more frontier-spirited emerging markets like Indonesia and the Philippines. Similarly, E*Trade allows all its Australian resident customers to apply to activate international share trading on their account; in their case it covers 11 international stock markets, including the big US and Canadian exchanges, the LSE, three Euronext exchanges in Europe, and Asian exchanges in Hong Kong and Singapore.
Buying a share through these platforms is really no different to buying a share in Australia. You put in an order, the broker settles it, you pay. Selling is much the same.
What’s different, though, is that a number of other variables come into play once you own a foreign stock. Firstly, the brokerage will cost more. Trading in the US, CommSec charges $65 per trade or 0.75%; on most southeast Asian exchanges, or even New Zealand or most European exchanges, it’s $130 or 1%.
Secondly, there’s currency risk. This isn’t something you ever have to worry about when you invest only in Australia. But if you buy a US stock, then your return will depend not only on how that stock does in America, but how the Australian dollar/ US dollar cross rate moves.
There can also be regulatory issues, such as the W-8BEN form that investors in the US have to register with the Securities Exchange Commission and Internal Revenue Service. Without it, Australians can end up paying withholding tax on their investments when they sell.
Another thing to consider are that shares held on the other side of the world will also trade on the other side of the world, in a different time zone. If you’re the sort of investor who likes to dip in and out of the market during the day according to what’s happening, that’s not going to be possible when the trading day is happening in the middle of your night. Generally, the availability of information, and the familiarity with a company and its products, is going to be more challenging in foreign countries than at home – if only because you may not know where to look.
That said, international shares offer access to some of the most established and successful names. These days it’s not uncommon to hear investors say they have more confidence in Coca-Cola than in most governments; blue chip multinationals have a long-term track record of good and stable earnings and can present excellent investment opportunities. As always, though, it’s best to stick with what you know, or at least with something you’re fairly familiar with; trawling Chinese mid-caps is best left to the experts.
