Beware of the cost trap – what should be considered when buying foreign shares?

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• Foreign stocks are recommended for diversification
• Cost trap when trading abroad
• German stock exchanges enable trading in foreign stocks

Investors should always keep risk diversification in mind when putting together their portfolio. It therefore makes sense to also acquire foreign stocks. There are also other advantages, such as interesting return opportunities from dynamic companies such as Apple, or the fact that some countries have a more pronounced dividend culture than Germany. But when investing in foreign stocks, there are a few things to consider.

Buying shares abroad

When investors buy foreign stocks on their home stock exchanges, there can be nasty surprises. In addition to the basic fee (broker’s commission), considerable third-party fees can be incurred, which the stock exchange and the broker collect abroad. These can be due again when you buy and then when you sell. It should also be noted that on exchanges that are not in the euro zone are located, the local trading currency applies. Brokers charge additional fees for converting euros into foreign trading currencies. There may also be country or stock exchange related taxes such as “stamp duty” on UK stocks. For these reasons, buying shares abroad is only worthwhile if the investment sum is larger.

If you want to find out about the exact amount of the third-party fees before making such an investment, you have to laboriously read the price list of your institute. However, these are often only given incompletely there, so that the investor even has to inquire at the external stock exchanges himself.

Another problem can arise when a stock is illiquid. If there are not enough shares available at the desired price, the securities order may only be executed partially or in several tranches. The resulting commissions and foreign fees are then to be paid several times.

Trading foreign shares in Germany

In view of the complicated and often high costs of trading on foreign trading venues, it makes sense to acquire foreign shares in Germany instead. In Germany there are a total of twelve stock exchange and four off-exchange trading venues where foreign securities can also be traded in addition to domestic shares. According to “BrokerExperte”, private customers have access to around 4,500 stocks from more than 60 countries, depending on the stock exchange.

On the one hand, the fact that the order fees are usually significantly lower than on a foreign stock exchange speaks in favor of buying shares on one of the domestic trading venues. Another advantage is that an order is always billed in euros at all domestic trading venues, regardless of the country from which the foreign share originates. The exchange rate is converted directly by the trading venue. There, the rate on the home exchange is converted into euros and an FX margin may also be included.

It is certainly also interesting for investors that foreign stocks can also be bought or sold on German stock exchanges when their home stock exchanges are closed. In view of different time zones, this is another advantage that should not be neglected.

In principle, it therefore makes sense to trade foreign stocks on German trading venues. But of course there are also reasons that speak for direct trading on the home exchange. This includes the higher liquidity and thus the better price quality for smaller special values, which are hardly traded on German trading venues. In addition, of course, there are also stocks that are not even allowed to be traded in Germany.

Editorial office finanzen.net

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