MARKET COMMENT
How To Buy Foreign Shares

By David Kuo (TMFDragon)
September 28, 2004

The reasons for buying shares in foreign companies can be manifold, though usually it boils down to just two main issues. Firstly, investors believe they can get better returns by buying abroad and secondly, investors may want to reduce risk by diversifying overseas.

Other reasons could include an urge to invest in companies for which there are no obvious British equivalents. For example, there are scant opportunities to invest in UK car manufacturers, though why anyone would want to is quite beyond me. Nevertheless, it is possible to buy shares in say, Ford (NYSE: F), General Motors (NYSE: GM) or DaimlerChrysler (NYSE: DCX), which are all listed on the New York Stock Exchange.

In years gone by, it was always quite a chore to buy foreign shares, and it could be quite costly too!

However, today a large number of foreign companies are listed on the London Stock Exchange. Consequently, it can be just as easy to buy shares in Pfizer (LSE: PFZ) on the London Stock Exchange as it is to buy shares in the same company on the New York Stock Exchange.

That said it may not always be possible to find the shares you want on the London market. So you may be forced to look for brokers that deal in foreign shares. If you plan to go down this route, it is always advisable to check commission rates carefully. Most brokers will charge more for dealing in foreign shares compared to UK shares.

Some brokers will also let you hold your overseas shares in their Self-Select ISAs too, which is a good way to shelter any gains you make from the taxman. The only condition is that the stock market is recognised by the Inland Revenue. Apart from wrapping up your foreign shares in an ISA, you can also put them into your Self Invested Personal Pension, which is another good way to shelter your gains from tax.

It is worth pointing out that it is not always necessary to buy foreign shares, if all you want is to gain exposure to foreign markets. The argument here is that investors can get sufficient exposure to overseas markets simply by investing in multinationals. For example to gain exposure to Asian markets, HSBC (LSE: HSBA) and Standard Chartered (LSE: STAN) would be obvious picks.

Personally, I buy foreign shares because some of the companies I like do not have a comparable counterpart in the UK. However, I am also acutely aware that there can be significant downside risks in the short-term. The most obvious of which are currency fluctuations, which can easily wipe out any shares price gains!

More: You can compare brokers here.