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Top Ten overseas stocks traded by British investors

 Investors of all sizes, from individuals overseeing their Isas to huge institutional pension funds, are increasingly global in their outlook.

For many, this means buying into one or more of the huge number of available funds which invest in other markets. But a growing number of DIY investors are going further, and buying shares in overseas companies directly.

This trend is gaining momentum so rapidly that most stockbrokers are refining their overseas shares service, cutting charges and offering new features such as the ability to hold different currencies or trade across many niche markets.

Why are Isa investors increasingly likely to own overseas shares?

Stockbrokers cite two main reasons for the growth in popularity of overseas share ownership. One is dividends.

While Britain's FTSE 100 index of blue chips includes many solid dividend payers, they tend to be restricted to just a few sectors: oil, banks, pharmaceuticals and tobacco, for example. So when a sector such as banking undergoes a major crisis, the consequent impact on a portfolio's dividend stream can be severe.

By looking to overseas companies with strong dividend track records investors can protect against this risk. Some of the most popular foreign stocks held in Isas include telecom giant AT&T (listed on the New York exchange or NYSE) and Microsoft (traded on Nasdaq). The latter has increased its dividend payouts for a decade.

Drug firms Novartis and Roche, whose shares are traded in Zurich, are other popular overseas divi payers, both having grown their dividends each year for several decades.

The second reason investors are drawn to overseas shares is to access the potential returns from new technology.

While British firms develop and produce innovative technologies, the world's biggest technology leaders predominate in the US.

The table, below, cites the most popular overseas shareholdings with the clients of Britain's biggest investment broker, Hargreaves Lansdown. The holdings are ranked by the number of trades.

Top ten of trades

Apple - Technology
Verizon Communications - Telecoms
Alibaba - Technology / retail
Google - Technology / search
Microsoft - Technology
Tesla Motors - Technology / automotives
Berkshire Hathaway - Investment holding company
Gilead Sciences - Biotech / Pharmaceuticals
Amazon - Technology / retail
Facebook - Technology / social media

SOURCE: Hargreaves Lansdown. Ranked by frequency of trading

With the exception of Berkshire Hathaway, which is the $350bn (£235bn) investment vehicle overseen by stockpicking guru Warren Buffett, the list comprises almost exclusively large businesses involved in new or evolving technologies.

Most of the names are recognisable to consumers and investors anywhere in the world. The less familiar include Tesla Motors, a company which makes fully electric cars, including luxury and sports models. It also sells batteries to other motor manufacturers including Toyota.

Tesla broke into profit in 2013. Its shares, which have gone from less than $40 (£27) in the beginning of 2013 to $200 (£134) today, are traded on Nasdaq.

Other possibly less familiar companies include Gilead Sciences, a biotech firm which develops and sells new drugs and treatments. Its shares, also traded on Nasdaq, traded for much of 2011-12 at around $20 (£13). They have soared in the past two years to trade today at around $100 (£67).

Alibaba is a vast Chinese online retailer, founded in 1999. Although almost all of its revenues and activities are in China, it floated on NYSE in September 2014, creating enormous interest among investors worldwide. Since flotation, its shares have fluctuated between $80 (£54) and $118 (£79).

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Holding overseas shares in your Isa

Isa rules have an annoying quirk: although you can hold foreign shares inside your Isa, you cannot hold foreign currency inside your Isa account.

So whenever you trade in foreign shares there will always have to be a foreign exchange transaction, which can add to the cost (see below for more details on charges).

Most brokers, including Hargreaves Lansdown, TD Direct Investing, Interactive Investor and Telegraph Investor, allow overseas shares to sit just like any other in your Isa portfolio.

In most cases the online trading process is exactly the same, too: you place the order and are given (usually in sterling) the price at which you will transact. As with any other order, this will expire after 15 seconds and if you do not trade within that period you have to request a new quote.

When you view your Isa portfolio's holding, your overseas shares will be shown alongside other investments, usually valued in sterling. There are some exceptions. Barclays Stockbrokers, one of the biggest three brokers alongside Hargreaves and TD Direct, does not allow customers to hold overseas shares inside their Isa.

This shortcoming arises from Barclays' use of another service to provide its international dealing. Barclays has said it is improving its broker service. But in the meantime, those who are thinking of switching Isa provider and who might want to own overseas stocks should look elsewhere.

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How much it costs to trade

When you trade UK shares with most brokers you pay a flat fee, typically £10 or £12 for an online trade. When it comes to overseas shares most levy the same fee - but with a currency conversion fee on top. This is normally worked out as a percentage of the trade.

The same commission usually applies to the conversion of dividends. And because you can't hold foreign currency inside an Isa, every dividend payment has to be switched to sterling.

At Hargreaves Lansdown, for instance, if you want to buy overseas stocks you pay the normal £11.95 dealing fee plus a 1.7pc currency conversion charge on trades up to £10,000.

That makes the process quite expensive.

Say you want to buy $10,000 worth of shares listed on the NYSE. You'll pay £11.95 plus about £114, bringing the total cost of the trade to almost £130. That's an expense which, remember, will have to be factored in both when you buy and when you sell.

TD Direct Investing operates a different charge, where only a percentage fee applies. But for smaller trades this can be as high as 1.5pc, again making frequent trading in overseas stocks an expensive process.

Telegraph Investor's service charges a flat £10, which applies to all share trades, plus a foreign exchange conversion fee of 1pc.

Are you going to buy and hold, or trade more frequently?

The costs outlined above are a deterrent for those making smaller transactions or who want to trade their international shares frequently.

If you are going to be using your Isa for your international holdings there is no easy way round this. The best you can do is identify your target holdings on the basis that you will buy and own them for long periods.

But for those who have trading accounts in addition to their Isa, there are cheaper ways to buy and sell overseas shares.

If you fall into this category, you could continue to use your Isa for your funds and British shareholdings, and then trade in US and other stocks in a non-Isa account.

The benefit of a non-Isa account is that you can hold foreign currencies inside it.

Both TD Direct Investing and Barclays Stockbrokers offer non-Isa accounts in which you can hold US dollars (and, at TD Direct, a wide range of other currencies as well) and buy US shares. When you transact you then pay just the "local" trading rates, typically between £10 and £20, depending on the size of the trade.

When you sell shares or receive dividends, the proceeds are kept in dollars and shown as dollar balances on your account.

Apart from significantly reduced trading costs, the other advantage of this approach is that you can use competitive currency providers to top up your dollar balances when you feel you could benefit from attractive rates of exchange.

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