How to buy foreign stocks

The world has around 60 major stock markets with a collective market capitalisation of nearly US$70 trillion. The Australian Stock Exchange (ASX) represents just 1.7% of that. There are plenty of benefits to investing overseas, not least of which is a more diversified portfolio and access to scores of industries, markets and opportunities that simply don't exist in Australia.

You may be starting to salivate, but don't know where to start. Here's a simple guide on how to purchase foreign stocks.

STEP 1: Choose an online broker

First, you need to choose an online broker. For the uninitiated, a brokerage account is the platform through which you can buy or sell shares.

Brokers charge a commission to buy and sell, and it's almost always more expensive to buy foreign stocks than those on the ASX. If you're investing small sums, you should consider sticking to the local exchange so that commissions don't take too large a chunk of your returns.

Typical brokerage fees for foreign stocks range from $20 to $60 for trades up to $10,000, or around the 0.40% mark for larger transactions. This is in addition to currency conversion fees, which we'll get to in a moment.

You can open an international brokerage account through any of the big banks, with the main choices being CommSec's Pershing account, Westpac's Global Markets account, NAB's International Shares account and ANZ's Global Shares account.

The big four all have similar pricing, though the Commonwealth Bank's Pershing account is Money Magazine's pick, and mine too. It isn't the cheapest, but it has an easy-to-use interface (I've tried all but NAB). If you have experience – positive or negative – with any of the smaller brokers, we would love to hear about it in the comments section.

In general, the application forms to open an international account need to be printed off and posted in, and you'll need to include photocopies of identification documents. Don't let this put you off, though; remember all those benefits of international investing we mentioned above, such as diversification and more opportunities.

The most likely place you'll trip up is the infamous W8-BEN form, which is used by the US Internal Revenue Service to prove you're a ‘non-resident alien' for withholding tax. Be very careful with this one as any mistakes – even a missing postcode, as I recently discovered – will get it rejected and potentially set you back weeks. You can find a good explanation of how to fill out a W8-BEN form here.

STEP 2: Load your account

Using CommSec as an example, once you have your international account registered, you will be able to access it through your ordinary brokerage account. After logging in, the fastest way to get to it is to scroll down to the bottom of the home page and click on ‘International' under the ‘Trading' menu. From here, you can open your international account by clicking ‘Launch Platform', which will take you to a separate website.

Before you can buy or sell stocks, you'll need money in your international account, which you can add by clicking ‘Transfer Funds' on the same screen that had the ‘Launch Platform' button.

One advantage of holding funds in your international account is that you're able to choose which currency you want your cash to be held in. Foreign currencies don't earn interest – not that you'd be missing out on much given where interest rates are – and it's also worth noting that you'll incur fees when exchanging between different currencies (including to/from Australian dollars).

CommSec's fee is the wholesale rate, so 25-30 basis points is typical for major currencies (30 basis points equals 0.3%). This is far cheaper than you will get at a Travelex or through an international money transfer, but you still don't want to trade in and out of a currency too often or it will bite into your returns.

Most of the stocks you are likely to be interested in are going to be in the US and denominated in US dollars, so this is probably the best starting place when choosing a currency. However, international brokers offer dozens of small markets too, such as New Zealand, Austria or Thailand. If you have specific companies in mind that you want to buy, check what stock exchange they are on before you transfer money.

STEP 3: Time to buy

Once your funds have been loaded, which usually takes a few days from the time you transfer, you'll be able to actually buy your chosen stocks. It should be smooth sailing from here.

Look for the ‘Trading' menu option on your broker's website. For CommSec, once you are in your international account (the one that opened in the second window) you'll see a menu option to ‘Transact' at the top of the homepage. Clicking this will bring you to the trading page where you need to enter the stock's code/company name as well as how many shares you want to buy.

You'll also be given the option to choose between a ‘limit' or an ‘at market' order under the section called ‘Order type'. Always choose the ‘limit' option and enter the maximum price you are willing to pay per share. The ‘at market' option is essentially telling your broker that you want to buy the stock at the best available price – whether it's $1 or $100 – so you're more likely to be caught overpaying, especially for volatile stocks. Even if you are happy with the current market price, add a limit price that is slightly above this in case the stock suddenly jumps on news you may not have seen yet.

If you're investing amounts under $5,000, it's probably better to buy the stock in one hit to save on brokerage fees. If, however, you have more to invest, consider ‘dollar cost averaging' by buying some today and then adding to your position gradually over time.

Once you fill in the details of your order and hit submit, it will either be matched immediately or may sit in the market until someone accepts your offer price. If your offer price is well below the current market price it will probably take longer to get matched.

And there you have it. As for what specific stocks to buy, that's a story for another day. When you're just starting out, though, it's best to stick to large high-quality companies (the ‘blue chips') and – thankfully – you'll find droves of them in overseas markets. Leave the speculative Peruvian miners for when you're more experienced.

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