Picking The Right Online Broker For US Share Dealing

2nd Feb '23 by Megan Boxall

23 comments 1833 reads

It’s the first week of February, which means US earnings reporting season has just kicked off. A time for investors to assess whether the monumental share price declines of the last year are justified by poor financial results, or if some of the companies which were rocked by indiscriminate selling in 2022 have retained strong fundamentals.

But that’s a topic for another day. This article aims to help UK-based investors of any ability pick the right platform or broker for US share dealing.

The Basics: 7 need-to-knows for investing in the US

If you’re a seasoned stock picker with experience of the US markets and simply want to use this article to check whether you could get a better deal on a different platform, you can skip this bit. But for novices, the following list should help you get going with direct equity investing in the world’s biggest stock market.

1. You can hold US shares in your ISA

Every Briton has a £20,000 ISA allowance every year and the money held in an ISA is exempt from capital gains and income tax. So don’t worry, you don’t have to forgo these benefits just because you’re investing in US shares.

2. You have to complete a W-8BEN form prior to buying US shares

A W-8BEN is a tax form you have to complete to say that you’re not a US resident. Most platforms which offer US share dealing include a link to the form which they then submit to the US tax authority on your behalf. By completing the form you are agreeing to pay 15% withholding tax on dividend income earned on US shares. This is deducted at the source so reinvesting your dividends won’t help you sidestep paying the tax. Income investors might want to stick to British shares.

3. The New York Stock Exchange (including the Nasdaq) is open from 9.30am to 4pm eastern time

That is 2.30pm to 9pm GMT so if you’re looking to buy shares when the market is open, you have a slightly different window to the UK share dealing time.

As some investment platforms don’t allow you to set limit orders for US shares, you’ll need to use your US share dealing window.

4. Not all platforms offer US share dealing

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Guybrush

2nd Feb '23

Barclays Smartinvestor recently added international trading, another option to consider if you want to trade US shares. I forget the fees but you can find these easily on the website.

A must read before trading is Stockopedia's very own book for getting started, https://www.stockopedia.com/bo...

I waited almost a year for Smartinvestor to become international but as soon as it did, I wasted no time in adding the US region to my regular UK subscription. Before trading it, you should definately check out the GBP/USD currency charts to see the current exchange rates. Best time to buy US shares would be when the pound is strongest, and to sell when the pound is weakest. Not looking at these rates, could be expensive as the rates can be volatile, pound dropped to 1.035 vs the dollar in October last year. Clearly that was an exceptional event caused by the incompetance of Liz, but current rate of 1.22 is still far below highs of 1.42 in 2021. However, I need to do some research myself in what drives currency rates, as my economics is quite basic:)

Timux10

With Interactive Brokers you may need to purchase data streams as well if you want to get up to date to price info through their platform. It can add up.

I opened a $USD account with Charles Schwab International and use their software. I just transfer GBP over to USD through whichever money company is giving the best rates at the time. So no fx charges per trade as its already in $USD, and they dropped their commission charges a few years ago as well.

The downside though, its not in an ISA and you'll need to manage your tax obligations. And of course you're committing x amount of money into USD.

Ajaib

3rd Feb '23

Interactive don't charge a monthly fee anymore but IG definitely do for a buy and hold investor.

Rusty2

IG group (LON:IGG) is actually pretty cheap, once you made 3 trades, in a month, then next month is free on US shares, only pay 0.5% forex fee. Trades do not need to be on US shares either. So you can do 3 $100 trades, only cost $1.50. This means you can buy small amounts, minimum is around $80 per trade.
I agree Hargreaves Lansdown (LON:HL.) are too expensive.

I will probably open an ISA with Interactive Brokers Inc soon. They are better for European shares than IG.

I don't understand the not user friendly platform for IG, I find it a lot quicker and easier than HL's. Problem with IG is their service.

IBKR's looks complex.

Lucky dip

Excellent article and helping me to clear the maze of various platforms fees.

I have account with IG, ii and smartinvestor.

I like ii because I keep various currency accounts and therefore the exchange rate does not affect me until the final day whenever it is going to be!

from time to time ii offer free trading in US shares , like now (1-3 February).

Overall I really enjoyed reading the article and I am sure will refer to it again.

googlyeyes

The FX charges, transaction charges and FX spreads that most brokers apply make it a major hurdle if you are planning to invest via an ISA or SIPP where cash must always be converted on each transaction. I have used AJ Bell (SIPP), Interactive Investor (ISA) and Interactive Brokers (ISA) for US shares at different stages - the first 2 I would say avoid, the charges are so high and spreads so wide it makes it very difficult to make progress and functionally they offer very little too. IBKR is much cheaper with tighter FX spreads and has much more functionality in terms of orders (you can enter a buy-stop or buy-limit with stop loss and take profit orders at the outset for example...with AJBell for example, you can really only do market orders)

An alternative approach for US markets would be to use a spreadbet account thereby removing the FX element. Not sure on IG as far as FX charges etc as I have only used them for a spreadbet account but I actually find the interface better than any of the others mentioned above. II seems to have reduced functionality in their latest release.

I believe US$ can't be held within an ISA, so although some platforms allow you to hold foreign currencies, you can't in an ISA.

If dealing outside an ISA then I would consider using Charles Schwab.

Good point about tax and SIPPs, I do hold Somero Enterprises (LON:SOM) in my SIPP for that reason.

Megan, I would be interested in a similar article on SIPPs.

Monty Carlo

There are a few further wrinkles to investing overseas. Whilst I do quite a bit myself, my general recommendation is to steer clear or use a fund manager/investment trust because you end up in a world of complexity most people didn't expect....

Withholding tax
Just an absolute pain from so many perspectives:

1. Applies differently to different accounts (for instance SIPPs different to ISAs for US shares). It should influence which account you hold which shares in (for instance Somero Enterprises (LON:SOM) holders should prefer their SIPP).

2. Filling in your tax return gets so much more complicated and time consuming (there is optionality with Foreign Income, and there can be some perverse outcomes). Be prepared to scroll through tax treaties to find the appropriate rate.

3. It just isn't practical or cost effective to try and reclaim in some jurisdictions. Just take a look at what you're meant to do if you have Santander shares (which many retail investors inherited via Alliance & Leicester).

4. Most platforms will go as far as processing a W-8BEN form and helping you with US stocks, but they generally can't be bothered to assist anywehere else (generally with good reason!). This then means you simply pay overseas tax on holdings in your ISA (& often your SIPP), whereas you could offset the overseas withholding tax against your UK tax if you held in your dealing/trading account....

FX Fees
Not only do you pay FX fees if you settle an overseas trade in £, you may find you pay an ongoing FX fee every time you receive a dividend in an overseas currency. AJ Bell does this (not always consistently I've found, as it was apparently a manual process).

Multi-currency accounts (not permitted in ISAs)
If you are serious about maintaining a long-term expsoure to foreign currency assets then you simply must use a platform that supports multi-currency accounts (such as Interactive Investor who are very good in this area). That way you pay the FX fee initially to convert £ into the necessary currency, but after that you can trade between overseas stocks in the same currency very efficiently indeed - no stamp duty on US$ trades. I often find it much more efficient to "bed & spouse" holdings in US$ than in £ when it comes to using up my annual CGT allowance.

If you have to go back to £ when switching from one US$ share to another (as HL and AJ Bell will force you to) then you are getting hammered. Only a buy & hold approach works on these platforms.

Capital Gains on Currency?
Another slightly absurd situation is that foreign currency bank accounts were finally excused from the CGT regime....but that doesn't necessarily apply to your foreign currency balance at your broker where it is held in a nominee account. If you build up a foreign currency balance (as you will with dividends) and make an FX gain, you need to report it for CGT purposes. HMRC knows this is impractical, but the rules say....

International Order Book
If you buy overseas shares that are available as ADRs/GDRs you may find your broker provides you a quote in £. This can be a bit of nightmare as there are 2 variables embedded in there - the local stock price and the FX rate (plus any charges). It is isn't immediately clear what price you've dealt at, although a rounded FX rate is often visible in hindsight once you get the trade confirm. You can eventually work it out, but painfully.

Offshore Funds
If you are ever tempted by offshore funds, think twice, or even thrice. Excess Reportable Income is an unbelievable mess, let alone the reporting or non-reporting status and the complications that causes for income tax and CGT.

Threepeat

Megan

Presumably you don't pay stamp duty so that offset costs a bit, or have you covered that somewhere

Steve

wildshot

Thanks for the article Megan.

As an ISA customer of IG for a number of years can I clarify/correct your spreadsheet on their fees:

- Firstly, the reference to being exempt from the quarterly fee if you hold £15k of funds across their accounts needs to be more specific. This is only if you have at least £15k invested with their smart portfolio, where they manage some investments for you. I self-manage my investments and have in excess of £15k. I only avoid the quarterly fee by trading at least 3 times a quarter

-Secondly, the free trade charge on US shares only kicks in the month after you've made 3 trades in the prior month.

snavir2022

Thanks for a very useful article. One suggestion, could you add a column to the article to indicate which platforms offer a real time quote when buying and selling ? I use Interactive Investor to trade US stocks, and one of the downsides is that when I place an order, especially for less liquid stock, the settlement price can vary significantly from the indicative price as they do not offer a real time quote as they do for UK stocks.

IG US prices are live, however when you trade you need to put in a limited order, ie buy 10 Microsoft (NSQ:MSFT) shares at $260. The prices are very close to the live ones. Limited orders are good, you don't need to watch all the time. With no dealing fees you can buy small amounts. The prices on IG match HL or can be slightly less. HL are not live either and no stop losses on foreign markets.
IBKR maybe live, not used yet.

Just doing a trial on IBKR, can't get on with it, first share Apple (NSQ:AAPL), got price, could trade. This is really heavy going, so slow.

ACounsell

4th Feb '23

Another alternative is to set up a US trading account with the likes of Charles Schwab. (No ISA or SIPP benefits). Obviously the initial funding involves transferring an amount of £ into $ so exchange rate risk (and in reverse) but I think commissions are zero and any other costs are minimal thereafter.

David Gaskell

6th Feb '23

I also use Trading212 and it seems great so far. I'd really appreciate someone wiser and more experienced who could help me understand the downsides of using this platform. I presume they make their money from wider spreads on their buy and sell prices.

Alphaflight

Megan, your spreadsheet is slightly wrong. Hargreaves Lansdown don't have custody fees for shares, see link below plus screenshot. They do charge for funds (Unit Trusts I believe) though.

"...Our annual charge depends on whether you hold funds or shares in your Fund and Share Account. There are no charges for opening an account, holding cash or inactivity."

https://www.hl.co.uk/investmen...

IBKR is the most sophisticated platform listed here. Once you get the hang of it, it all makes sense.

stehuk

No they don't make money on the spreads. As I understand it that would be illegal. I believe they make money from CFD trading accounts and a little from lending out shares on the invest accounts (not on the ISA accounts).

But I do find the spreads on smaller companies usually to be the official spreads, which can be large. On another platform I use (X-O) I can often deal well inside the spread. So far larger buys of smaller UK companies I find X-O a lot better. (In case you are wondering, X-O doesn't cover international shares.)

Also, Trading212 don't cover all segments of AIM, and they have limits on quantities of purchases of illiquid stocks. I hold a quantity of Vertu Motors for example that I couldn't get to hold on Trading212 if I wanted to because of the restrictions (although they do review the limits if requested and frequently increase them).

But I've found Trading 212 very good for trading of large US companies for example. I don't buy large quantities though because the value of my only ISA , which is with Trading 212, stays small. I've used it for quite a while now and find it great for what I want it for, but it does have some limitations.

Thanks, yes it maybe just a case of getting used to it but it does seem slow compared to IG, which is quick and easy, I really don't understand Megan comments. HL is a bit slow and clunky.

There are different functions on these platforms, which I don't think has been covered, such as limited orders, stop losses and charts.

HL now pays a reasonable rate of interest on cash balances, around 1.50% depending on the amount, this has gone up about 1% this year, with cash trapped in an ISA or SIPP, this could make a difference. IG don't pay anything.

Service also varies considerably. I had a simple matter with IG, when a ETF delisted and transferring to a different ETF, so simple, this took numerous phone calls, emails and threats of closing my account to resolve. They should have advised me options which they never did.
HL not as good as they used to be but much better than IG.

Sunil

11th Sep '23

Thanks Megan, useful article. Worth noting there is no withholding tax on US shares if you hold in your SIPP.

Picking the right online broker for US share dealing

The Basics: 7 need-to-knows for investing in the US

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Megan Boxall

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