Thursday, March 19, 2009

Buying American Shares

Why should you consider buying US shares and how do you go about making your purchase?

The Australian stock market makes up only a couple of percent of world equity markets by market capitalization while the US stock market is a whopping 30% (based on some figures I found relating to values back in early 2007). This is a marked contrast and may give you an insight into why you might consider buying American shares.

Apart from being a much larger stock market by market capitalization and having an economy many times larger than Australia's, there are many more companies listed on US stock exchanges including some of the largest in the world.

Consider global companies with household brand names like Coca Cola, Johnson & Johnson, Kraft Foods, McDonalds and Microsoft among others. These are huge, truly international companies which dominate their industry the world over. It's hard to think of any Australian stocks which have the global reach and market dominance of these American giants.

So how do you go about buying US stocks? Broadly speaking, there are 2 main ways to go about it. You can either buy directly or you can invest in a managed fund which has at least some exposure to the sector.

A number of Australian stock brokers allow you to buy American shares. I'll let you do your own investigation as to the services offered fees (brokerage, etc) charged. I know that Commonwealth Securities charges $65 per trade. Remember that you'll need to do your own research into which stocks to buy. Also tracking your investment becomes even more important because you're less likely to hear about these companies through the Australian news media.

The other option is to invest via a managed fund. In this way, you don't need to worry about researching specific stocks. The fund manager does the leg work for you. Of course you should still put in the effort to choose one or more fund mangers to whom you happy to entrust your hard earned cash. Almost all international managed funds will have exposure to US shares but some fund managers offer products which target North America specifically. Of course, you will pay for the expertise of the fund manager through the ongoing management fees which are charged on your investment.

One of the risks inherent in being an Australian buying American shares (or buying international shares in general) is currency risk. Currency risk is the chance that the exchange rates chance between when you buy and when you sell. If the Australian dollar strengthens against the US dollar, you will lose money. This is because each US dollar you get for selling your American shares will no longer buy as many Australian dollars.

Of course this cuts both ways. If the Australian dollar drops in value against the US dollar (as it has done recently) you will end up with a greater profit. However, the important thing to remember is that it's notoriously difficult to forecast foreign currency movements. Therefore you need to be aware of this extra risk in on top of the general market and stock specific risks.

If you decide to go with a managed fund, you have the option of choosing a hedged or unhedged fund. Hedging means the manager will use currency derivatives to eliminate the currency risk. An unhedged fund will give you full exposure to currency movements - both up and down.

I'll leave you with one final thought. If you have your retirement savings invested in an Australian superannuation fund, there is a good chance the fund manager has been buying American shares on your behalf.


Miss K said...

Do you know whether you get taxed in the States on capital gains and dividend payments? If you do, is that income then double taxed in Australia?

aussie said...

Sorry Miss K, I'm not a tax professional, so I'm not able to offer you any advice.

However, based on my limited understanding, you do get taxed in the US. However when you pay tax in Australia, you get credit for tax already paid overseas, and only pay the difference between the US tax rate and the Australian tax rate.

This is a complex area and differs from country to country depending on whether there is a tax treaty or not.

Needless to say, make sure you get advice from someone qualified in this area before you make any decisions.