Overseas brokerage - Part 2

Here's the link to part 1. Before you can trade, obviously you need funds in your account. CommSec, not wanting to part with tradition, makes things difficult.

You have to call them and ask for funds to be transferred from your nominated bank account into your Pershing account, which takes two business days (if you call before 11am you save a day). One advantage of this is that you're able to hold foreign currencies, although these don't earn interest (not that you'd be missing out on much at the moment).

An E*Trade account, on the other hand, comes with a dedicated Australian dollar bank account, although interest rates are paltry for balances below $50,000. When you buy international stocks the account is debited and the cash is automatically converted to the correct currency. It's far easier than the CommSec carrier pigeon approach.

A foreign exchange 'buffer' of 2% is also added to all E*Trade purchases. This is a margin of safety that ensures there is enough cash to execute purchases should exchange rates fluctuate before the trade is filled. The actual rate you pay doesn't include this buffer.

Trading itself is a simple matter. Though the CommSec Pershing website is a little different to the normal CommSec one, it's easy to use and place trades.

E*Trade is even better; trading is exactly the same for Australian and international shares, and you can access overseas markets by clicking the 'Global Shares' tab on the trading page.

But wait, there's fees

Disappointingly, neither E*Trade nor CommSec disclose all the fees associated with overseas trading in the one place. Though the fees are difficult to find on the websites, you can be sure you'll find them on your trading statements. It's always worth making a call to your broker just to make sure what you'll be charged. 

Brokerage for overseas markets is significantly more expensive than for Australian stocks (see Table 1). While a trade of less than $10,000 will set you back about $20 for an ASX listed stock, be prepared to pay the greater of US$71.50 or 0.825% of the value of your trade using Pershing, and the greater of $64.90 or 0.65% using E*Trade.

But the fees don't stop there. You'll also incur fees when exchanging cash from Australian dollars to foreign currencies. CommSec's fee varies depending on the cost of exchanging wholesale sums of money, and 25-30 basis points is typical for major currencies (a basis point is 1/100th of 1% so 30 basis points equals 0.3%).

E*Trade's maximum fee for changing currency is 60 basis points. Although it was difficult to get a straight answer, I was told this might go as low as 30 basis points if you're lucky.

Some individual stock exchanges also levy their own fees, which are then passed on to customers. Ones to watch out for are the London Stock Exchange, which applies stamp duty of 50 basis points on purchases, and the Canadian Stock Exchange, which charges a flat fee of 1.65 cents per share, regardless of their value.

Both CommSec and E*trade allow you to participate in major European, Asian and US markets, with CommSec having an even more extensive range of options if you're prepared to make your trades over the phone.

CommSec also charges some extra fees. If you hold stocks or cash in your Pershing account and don't trade during a calendar year you'll be stung for $75.

Having trade confirmations mailed to you will cost $2, but you can ignore the foreign securities custody fee that they disclose; it hasn't actually been charged for about two years, according to CommSec's customer service.

In short, an absolute minimum of about 1% of your investment will go towards fees when trading international stocks, and more for smaller trades or markets. Though this is ten times the 11 or 12 basis points you'll pay for a large trade on the ASX, it still isn't significant if you're buying shares for the long term.

There's some truth to the marketing; with only 2% of the world's listed businesses, buying only Australian stocks limits you to 2% of the opportunities. If you've got the time to hunt through foreign markets, there are many bargains to be had. Now you know how to go about buying them you really have no excuse.