Investing in foreign stocks
Why would you buy foreign stocks?
Diversification is the biggest reason for buying international stocks. Some others may cite large, liquid foreign markets as another reason.
However, with a great number of very liquid stocks traded on the Singapore Exchange (SGX), that’s not such an issue anymore, particularly for retail investors who trade in values of tens of thousands of dollars or even for larger individual investor trades that run in the hundreds of thousands of dollars.
Geographic diversification is a valid motive for venturing into overseas stock markets. That is, if you hold too much of your stocks in the Singapore market, any adverse economic, geopolitical or market events specific to Singapore could put a significant dent in the value of your portfolio. That’s the defensive angle.
Looked at more positively, buying international stocks is about gaining exposure to the “wealth of the world”, riding on the success of different markets around the globe.
In that search for exposure to the “wealth of the world”, there may be specific companies, with unique products, services, business models, or technologies, that you might believe would be particularly successful, such as business offerings that you will not find locally.
What should you look out for when buying foreign stocks?
Is it an established, developed market or is it a “frontier market”?
Riding on the wealth of the world is about buying a small piece of the corporate sector of productive and well governed economies and markets.
In developed markets, even if stock prices do go through bearish phases, stock prices generally “mean revert”, that is they fluctuate up and down on rising trendlines over the long-term.
Frontier – or very new – markets often have not yet established that sort of history. They may suffer a lot more volatility than developed markets. Furthermore, liquidity in these new markets can often be poor, meaning buyers can suddenly disappear.
Know the companies you’re buying into, as you would with local stocks
You may be more familiar with the Singapore corporate names and their reputations. Make sure you have a reasonable level of knowledge and comfort in the foreign companies you’re buying into, whether they are in the United States or Germany or China.
As you would with local stocks, ask for investment research into those companies as you do your evaluation.
Understand the currency risks
When buying local stocks, the calculation, distilled to its most basic, is “will the stock price go up or down”?
Nevertheless, when it comes to buying foreign stocks, the calculations are not as straightforward. Things you should consider are whether the share price will go up or down, and will the currency in which the stock is denominated go up or down against your base or natural currency, which for most Singaporeans is the Singapore dollar.
Foreign transaction and custody costs
Apart from the usual brokerage commissions, there are additional costs in transacting in foreign stocks, which vary according to the country/market.
Ask your broker to confirm the fees for each of the overseas markets you plan to trade in. Some examples are:
- Custody fees: When you buy Singapore stocks, your shares can be held through the Central Depository (CDP). Your foreign stocks will likely then be held in a broker’s custody account. That will incur a fee of typically a few dollars a month or quarter.
- Charges for notifying you of corporate actions such as rights issues and dividend re-investment.
- Transaction fees peculiar to each market: For example, in the US, a fee equivalent to a very small percentage of the trade is paid to the Securities & Exchange Commission.
Check your tax obligations in each of the markets you invest in. A withholding tax is the most common. Indeed, when investing in US stocks, you have to fill in a declaration (in a form called W8BEN) to the US tax authority that you are a foreign beneficiary of income from those stocks. Then a standard ‘treaty withholding tax’ will be applied to your income derived from US stocks. Also, be aware of goods and services taxes that may apply in some countries.
How do you go about investing in foreign stocks?
In much the same way you would with local stocks, except for the custodian account that you would need to maintain with your stockbroker. Most Singapore brokers and banks offer access to a wide range of international markets, either online or via dealer-assisted trades. If you are buying via an online trading platform, refer to our guide on online trading. Before you start trading in international stocks, make sure you are familiar with the charges and the tax obligations of each of the markets you trade in.
And if the charges, taxes, and rules are still a bit too much for you to understand at this point, you may explore two alternatives:
- Buy exchange traded funds in foreign markets via the Singapore Exchange.
- Buy into unit trusts that invest in foreign markets.
These will offer you not just geographic but also stock diversification – meaning you can be invested in a large portfolio of foreign stocks for a relatively small amount.
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