Internet dealing means access to US shares is as easy as apple pie. Simon Keane investiates the online services available and how to get the best value for money
It is about 3,000 miles further away than continental Europe but if you’re thinking of investing in America’s stock markets, it may as well be around the corner. Internet dealing has transformed the way we trade US shares in the same way it bought about a revolution in dealing UK stocks a decade ago.
If you want to trade European stocks, the chances are that for the time being, you’ll be restricted to a phone dealing service. In comparison, internet broking in US shares has already arrived. What this means for the private investor is low flat-rate fees versus the more expensive commission-based charges associated with dealing over the phone.
But before you rush off and sign up with an online dealer, it’s worth pausing to consider the level of service that suits you best. While linking up directly with US markets will give you the best bid and offer prices, for an infrequent trader currency charges will work against you, in which case the London Stock Exchange’s International Retail Service (IRS) is probably more suitable.
Counting the costs
Brokers already offering comprehensive online trading in US shares include E*TRADE, TD Waterhouse, Interactive Brokers and Luxembourg-based Internaxx (the latter’s offshore status is useful for expatriates, as HM Revenue & Customs won’t be able to touch capital gains earned on US trades). Dealing fees across the board are roughly comparable to trading in UK equities, starting at £12.50 at TD Waterhouse (exactly the same as for UK equities), while E*TRADE currently charges a standard $19.99 rate, especially cheap against the currently weak dollar.
These services will link up directly to America’s three main markets, the New York Stock Exchange (NYSE), the American Stock and Options Exchange (AMEX) and Nasdaq, where global giants Microsoft (MSFT:NASDAQ), Google (GOOG:NASDAQ) and Apple (AAPL:NASDAQ) trade on spreads of fractions of one percent. For example, at the time of writing the bid price on internet search engine giant Google sat at $510.20, while the offer price stood at $510.37, representing a mere 0.03% spread. It’s a similar story for iPod-owner Apple at $122.86/$122.87 (0.008% spread) and Windows maker Microsoft at $29.99/$30.00 (0.03% spread).
But to get the full picture of the cost of an American purchase, you have to factor in foreign exchange (FX) costs. As a starting rate (for deposits of up to £50,000), TD Waterhouse will sell you dollars at 1.5% below the Royal Bank of Scotland’s mid-market wholesale exchange rate (E*TRADE offers a similar spread), which is a significant marginal trading cost when you are talking about spreads in the one hundreths of a percent.
At the time of writing, you’d get about
$1.973 for every pound you deposit in your TD Waterhouse account. So, were you to buy a typical lot size of 100 Microsoft shares, at an offer price of $30, it will require £1,520.53 investment, giving a total deposit of £1,533.03 once the broker’s £12.50 standard dealing fee is added. Doing this as a one-off trade, however, would work out over £10 cheaper if you instead use the London Stock Exchange’s IRS system. IRS is not the same as buying the shares directly since you instead purchase an instrument based on the share called a Crest Depository Receipt (CDR), which tracks the underlying stock price. Spreads on IRS are wider but being Sterling denominated, there is no FX cost.
To give you an idea of the difference in IRS spreads, at the time of writing the bid/offer for Google was £254.72/£257.47, equivalent to a 1.07% spread, for Apple it was £61.40/£62.03 (1.02%), while Microsoft was at £15.01/£15.09 (0.53%). But for an infrequent trader, IRS stills works out cheaper because you avoid paying an FX that comes with investing direct.
Going back to the Mircosoft example, 100 shares will have cost you £1,509 on IRS, or 1521.50 including the £12.50 broking fee. You may think an £11.50, or 0.75%, saving makes little odds to an infrequent trader but the IRS advantage is simplicity, buying a CDR is like buying a UK share so you won’t have to open a new dollar broking account.
A fair deal
However, for active traders the advantage of having a dollar account is that it will quickly save you money since it allows you to take proceeds from the sale of a US stock in dollars which can then be reinvested again. This means you won’t have to carry out an FX transaction every time you buy, spreading the fixed currency cost over many trades.
In addition, an active trader is likely to be depositing larger sums attracting better FX rates. TD Waterhouse FX rates fall to RBS rate +/- 1% for deposits of £50,000 to £100,000, 0.5% over £100,000 and 0.25% when you deposit more than £250,000.
For a full breakdown of charges visit:www.tdwaterhouse.co.uk/international/
international_fx.cfm.
The frequent trader will benefit from lower fees in E*TRADE’s case too, with fees dropping to $9.99 if you trade 30 times or more in a quarter, or have $50,000 or more in sat in your account. This compares to an £11.95 standard frequent trader fee at TD Waterhouse.
In addition to taking a spread on the currency, some brokers will have a further charge for converting currency. E*TRADE has a currency charge starting at 1.25% – although this falls to 0.25% for larger transactions – but the broker will allow you to change your currency at your bank, so you may be able to find lower charges.
Once again this additional currency charge should be taken into account when weighing up the advantages of direct versus IRS. Taking the above example of 100 Mircosoft shares again then in the case of E*TRADE, you’d need to deposit $3,019.99 (assuming the standard $19.99 flat-rate fee) plus $37.5 (to cover the currency charge) into your account, giving a total Sterling consideration of £1,549.67, versus around £1,520 had you bought via IRS.
America, home to the world’s largest stock markets, was always going to be wired up first to internet broking. This means that you can avoid the more costly commission-based charges of telephone broking. Linking up directly to the US will give you a huge variety of companies to choose from enabling you to access the key NYSE, AMEX and Nasdaq exchanges but it is not for everyone. If you’re you’re only planning infrequent buying trips then the LSE’s International Retail Service is probably the best option since while spreads are wider you’ll avoid having to pay foreign exchange costs.
Other advantages of going direct to US markets
Aside from finding it cheaper, the active trader will discover much more choice by going direct. IRS only offers 150 of America’s biggest companies, leaders like Microsoft, Google and Apple, while direct investing will link you up to every company on the NYSE, AMEX and Nasdaq exchanges as well as to many regional bourses.
In addition, there are less obvious benefits such as the fact many of the major Asian corporations have secondary listings in America . Many London brokers can buy these Asian companies on their primary markets but you have to use expensive telephone broking services beacuse, as with Europe, Asia remains the next frontier for internet dealing.
Furthermore, many of the big European companies have American Depository Receipts (ADRs) listed in America and high trading volumes means liquidity may actually be better than the home listing, as Salim Sebbata, director of UK Retail at E*TRADE, comments: ‘Companies such as Telefonica and [Banco] Santander have quite high volumes.’
