It seems British citizens are still not convinced with the idea of investing in foreign markets.
Over the past years, investment in foreign markets has increased at a rapid pace. In 2020 alone, there were one million trades on overseas exchanges, while 7.5 million deals happened in the UK. So even though we can’t justify why people preferred the UK markets more than other exchanges, it’s good to see them think like international investors.
Speaking of investing, if you are attracted to foreign markets but are confused where to begin from, here are a few tips to give you a nice head start.
Markets that are good for investment
In our opinion, markets in the US, Western Europe, and Canada are the best investment options. That’s because they allow you to hold shares in the form of Crest Depository Interests (CDIs). Even though the trades done through Crest aren’t visible to you, they lessen the burden of the brokers who need to become members of the local securities depository before buying shares in other countries. If you want to enter such exchanges where foreign investors are barred from buying and selling directly, you can acquire ADRs and GDRs.
If you hope to invest in Europe and US markets, you can use brokers like Saxo Capital Markets, iDealing, Interactive Brokers, Hargreaves Lansdown, Interactive Investor, and AJ Bell Youinvest. They deal in a wide range of markets while other share dealings like iWeb, Lloyds, IG, or Halifax target only a limited range of exchanges.
The reasonable brokers
It’s quite difficult to estimate which broker is the most reasonable because different people have different requirements. Plus, the size of their trade also varies. However, when investing in foreign markets, you should always watch out for the currency you’re using. That’s because the dealing rates for foreign securities and UK securities are different.
When you convert sterling to other currencies, the value is always marked up. That means you’ll have to pay more money while trading in sterling than in foreign currencies. Another thing you should keep an eye on is the Foreign Exchange (FX) Commissions. Usually, you have to pay between 0.5% and 1.5% in FX Commission, but the value varies with the size of a trade. To save on this, you can choose Interactive Brokers, as they have a minimal FX margin.
Taxation on dividends
The bitter truth is that many foreign governments deduct an amount from your dividend before paying it. The deductible amount depends on the treaty between the UK and that country.
Normally, this percentage falls in between 10% to 15%, but it can also rise to a notable 35% for countries like Switzerland. So, before investing, you should always calculate the approximate amount that you will be paying as taxes and then decide how good the investment is.
Summing it up
Even though the foreign markets look lucrative, they can be very dangerous if you’re not aware of where and how to invest. So we would recommend that you consult an investment advisor before making any decision.