Nanalyze

How to Trade Foreign Stocks on Foreign Stock Markets

While the majority of our readers hail from the United States (~66%), the second largest representation in our readership is the U.K. (8%, innit) and of course Canada is in third (5%, eh). What this means is that a majority of our readers deal primarily in U.S. equities. Finance people call this “domestic bias”, sociologists call this “ethnocentrism”, and we call it a missed opportunity. It’s important that all investors know how to trade foreign stocks on foreign stock markets.

The United States is no longer the pinnacle of power it once was. The Chinese are living longer than everyone else, and they’ve managed to procreate more than anyone else. They’re winning the biological game and one could argue that they’re also catching up in the capitalism game with the second largest number of unicorns (43 or 23% of all unicorns) after good old ‘Murica. Of course it’s hard to tell since everything over there seems to be written in strange characters or Engrish. The key takeaway here is that, in order to be a proper emerging technology investor, you need to know how to trade foreign stocks on foreign stock markets.

For those of you with MBAs or degrees in marketing, the below chart will probably look a bit familiar (source CX Journey):

We’re not sure about you, but anytime someone pulls up a “2 X 2” like the one above and starts using terms like “ninja”, “growth hacking”, or “apostle”, our eyes glaze over and we tune out like we just took a big fat hit of skunk and a rerun of Family Guy just started. However, the above chart is useful in showing just how passionately we love the company we’re going to talk about next. You see, we’ve been “apostles” of Interactive Brokers for as long as we’ve been using their brokerage platform. They’re simply the best brokerage firm out there for intermediate-level retail investors.

Interactive Brokers (NASDAQ:IBKR) is a $15 billion publicly traded brokerage firm that knows full well that they’re the best option for investors looking to trade foreign stocks on the actual foreign exchanges they are traded on. While we could go on and on about the merits of their platform, like the fact that U.S. equity trades cost just $1 per 100 shares, the purpose of this article is to talk about one thing – how to use Interactive Brokers to buy foreign stocks on foreign stock markets.

The first step is to get your account setup, which is easy enough. Then, you’ll need to identify which foreign stocks you’d like to buy. One stock we bought a few years ago on the Tokyo Stock Exchange was Softbank (TYO:9984). And guess what? We actually bought Softbank in an IRA account that we converted over from an old 401K. When 86% of active managers can’t beat a simple index benchmark, you’re probably better off managing your own retirement funds provided that you diversify your positions and (if you’re a novice investor) put the majority of your investing $$$ in cheap ETF tracker funds like those offered by Vanguard. Anyways.

We wanted to buy Softbank because of their vision to be a leading technology company and all the recent actions they’ve been taking to that end tells us they’re on track. The first thing we had to do was get some Japanese Yen because when you trade stocks on a foreign stock market, you need to use the host country’s currency. This is where things get a bit confusing for novice investors because there is no “buy Japanese dollars” button. Japan uses a currency called the “yen”, and we’ll actually need to sell the USDJPY currency pair to “buy yen”:

If that’s confusing, don’t worry. The worst things that can happen here is you make a mistake with the trade and have to reverse it. Since you are buying at SPOT RATES, the only loss will be any minor movements that take place between the buy and sell, and of course the transaction costs. In other words, it’s super easy and cheap to switch between currencies (which is why we use IB for international forex transfers as well). Next, we need to actually buy Softbank using our newly acquired Japanese yen:

One thing that you’ll become painfully aware of at this point in time is that many exchanges sell only in round lots (100 shares minimum and any multiples of 100 thereafter). In other words, in order to buy shares of Softbank, you have to buy them in increments of 100. At this point, some investors will wonder what the big deal is while other investors with less firepower will find this cost prohibitive. Once you click “Preview Order” you can then put your order in and you’ll be charged the Interactive Brokers trade fees (about $1.00 per 100 shares) in addition to whatever exchange fees are levered. Note that this won’t be like some brokerage firms that charge you a “$75 foreign transaction fee” or something ludicrous like that. We’ve used IB to trade stocks on quite a few foreign markets and with the exception of the Hong Kong Exchange, all the transaction fees seemed reasonable.

While we used the Tokyo Stock Exchange in the above example, Interactive Brokers gives you the ability to trade on over 100 foreign exchanges in 24 countries, fund accounts in multiple currencies, and enjoy direct market access to stocks, options, futures, forex, bonds, ETFs and CFDs from a single account.

So why doesn’t everyone just use Interactive Brokers and be done with it? Mainly two reasons:

  • They require a $10,000 USD minimum to open an account. With the atrocious savings rate in America, many people may have a six-figure job and still have a tough time coming up with $10,000 USD. Note that you can also transfer in IRAs and 401Ks so there’s something to do with all those mutual funds that are charging you exorbitant fees for a horrible track record of not outperforming the overall market.
  • It’s not the easiest platform to use. Don’t expect any cuddles to make you feel better after you fcuk up a currency trade. Don’t expect any sort of “are you sure you want to short $100,000 worth of Apple stock on margin” type messages. Speaking of margin, it’s best to get one and then not use it. You’ll need it to shorten the time it takes to do currency trades. You are responsible for figuring out how to use the platform. It’s not that bad once you get used to it.

So there you have it. The folks over at Interactive Brokers have been kind enough to give us some pennies we can use to buy food for our families if you open an account after clicking this link. If you’re thinking about trading some foreign stocks on foreign stock markets, give Interactive Brokers a go. You’ll become an Interactive Brokers “apostle” like us in no time.

  • wije

    Another problem with IB is they charge an inactivity fee for balances less than $100,000, so it’s not good for buy-and-holders.

    • Nanalyze

      Yes, thank you for pointing that out.

      Accounts with balances under $100,000 must meet a minimum of $10 a month in trade commissions, or Interactive Brokers will charge the difference as a monthly fee.

      If you are doing dollar cost averaging into at least 10 positions a month it becomes a non-issue.

    • Nanalyze

      Also thank you for all your very astute comments! It’s always great to hear insights from our readers.

  • MARIO

    WHAT Website do I use to transfer my American money into Canadian currency?

    • Nanalyze

      Hey Mario,

      Use Interactive Brokers for everything. Where you go to trade stocks, one of the tabs says “Forex”. That’s where you can buy or sell currencies. Just take your time and do it slowly. Look for the pai USD/CAD. Can be confusing at first but don’t worry, you can’t hurt yourself too badly!

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