Like Traveling Abroad Without Your Shots
The Internet can take investors anywhere on the globe. Whether they ought to follow the Web into foreign stock markets is another question. Two new online brokers are extending the reach of online investing to "foreign ordinaries"--stocks in overseas companies that don't trade on U.S. markets. Intltrader.com and Globeshare.com promise near-instant online access to quotes and trading in companies such as Porsche or Tokyo Electron. "If you can get us a symbol, we'll get you a quote and a trade," says Brent Bessire, Intltrader's chief operating officer.
Most experts recommend that you invest a portion of your portfolio--up to 20% for aggressive investors--outside the U.S. Besides diversifying risk, foreign stocks can let you play outstanding prospects, such as the world's top cell-phone makers, and surges in hot markets, such as the 50% rise in Hong Kong's Hang Seng Index in 1999. A handful of global companies list shares in the U.S., such as AirCanada and Elephant & Castle Group. But the main ways for Americans to own a piece of the globe are through international mutual funds or American depositary receipts (ADRs)--exchange-traded certificates representing ownership of stock in such foreign companies as Nokia or Acer.
Foreign ordinaries are less accessible. Most retail brokers know next to nothing about stocks that aren't listed on U.S. markets. One exception: Merrill Lynch, which trades some 6,000 foreign ordinaries and makes them available to its customers online or through a broker. Globeshare and Intltrader promise specialized knowledge about overseas investing and extensive research on foreign stocks. They've also worked out thorny back-office issues, such as trade clearance, custody of stock certificates, and translating everything from quotes to dividends from foreign currencies into dollars.
Even so, investors ought to think twice about going offshore on their own. Investors on foreign bourses face such hurdles as taxes on stock trades and looser, less investor-friendly accounting standards. Currency risk is also a major concern. Brokers will sell foreign ordinaries and ADRs in dollars, but those prices are based on stock that trades in a foreign currency. If the dollar's value rises on foreign-exchange markets--as it has lately against the yen and euro--your overseas equity portfolio will suffer. You'll have to hope that market gains outpace currency losses. "Even if you're a seasoned investor, there's a lot to discuss before you buy stocks overseas," says Steve Chandler, director of Charles Schwab's global-investing service. Schwab won't trade ordinaries online. "If our customers want to trade offshore, they have to talk to a specialist."
One of the toughest problems for the global-minded is the clock. Market hours in Europe overlap only briefly with the U.S. trading day, and Asian markets don't overlap at all. Big U.S. brokers, such as Merrill, and specialty firms, such as International Assets Advisory (IAAC)--Intltrader's affiliate--make markets in some ordinaries around the clock. But most such stocks are thinly traded, at best, in the U.S. An American who wants to trade without using No Doz can have immediate execution or access to deep markets--but not both.
Intltrader is betting that traders will want instant gratification. Operating from 8 a.m. to 8 p.m., Eastern time, Intltrader will depend on IAAC and other U.S. market-makers to execute most of its trades in real time. Trouble is, it's risky to make a market in any stock when most of its native investors have gone home. Market-makers cope with that risk by widening their spreads: They'll bid an eighth or a quarter less to buy shares and ask a little more to sell them during off-hours (chart). "After-hours, markets get pretty frothy, and spreads will widen," says Bessire. Those spreads mean investors aren't paying as low a price as the one they might get during the home market's active hours.
Globeshare takes a different approach. It's linking brokerages around the world--now in 15 countries, aiming for 50--under the Globeshare brand. Indeed, "most of our initial business will come from foreign investors wanting to buy into the U.S. market," says Anastasio Carayannis, CEO of Globeshare and its publicly traded parent, Laidlaw Global. The firm will operate 24 hours a day, and U.S. customers will have three options: Trade during the day with a U.S. market-maker, place an order for overnight execution in the home market, or trade between dinner and breakfast via a home-market broker.
Schwab's execution depends on order size. Most of its global orders exceed $10,000 and are held for execution during home-market hours. Smaller orders tend to go to U.S. market makers. At all three brokers, investors can protect themselves from overpaying by placing limit orders--a smart strategy even in U.S. markets.
Trading costs are tougher to calculate abroad. Globeshare charges $25 for a foreign trade, plus local clearing fees (from $20 to $100) and taxes (0.5% of the transaction in London or 0.15% in Sydney, for example). The site spells out fees before you trade. Schwab, too, adds expenses to its charge, which is based on its phone-trade commission ($112 for 1,000 shares trading at $10 a share, for example), not its online rate. Intltrader's $29.99 fee covers all costs. Both new brokers offer U.S. online trading: Market orders cost $29.95 at Globeshare and $14.99 at Intltrader.
Rivals say they see little potential for buying foreign stocks online. "Our customers don't express much interest in foreign ordinaries," says a PaineWebber spokesman. "Customers will continue to have a higher comfort level with ADRs," says Thomas Joyce, Merrill's head of global equity-market structures. Other e-brokers, such as E*Trade Group, are focusing on overseas networks to bring foreign investors to U.S. markets.
While ADRs and global funds add costs to overseas investing, they also follow U.S. rules for accounting and disclosure. And they're more likely to be tracked by U.S. analysts. Tackling foreign ordinaries without those advantages--and at an online broker to boot--is a job for only the most adventuresome investors. For the rest of us, Internet investing overseas will remain a bridge too far.