Foreign Securities Fees
There are many good reasons to include international stocks in an investment portfolio. Whether it be for political stability, currency diversification, or to create a balance between the world’s largest international companies, many investors enjoy looking beyond US borders when it comes to building their portfolio.
Experienced investors will likely be aware of the intricacies involved with investing in foreign stocks, the traders who are relatively new may be surprised at some of the hidden costs that come with foreign securities. One of the most surprising is the foreign securities fee.
What is the Foreign Securities Fee?
The foreign securities fee is a fee commonly incurred in the background and is often considered a hidden fee. Brokerages do not hide the fee, of course, but they also do not advertise it. To learn the amount that your brokerage charges for trading foreign securities, it is best to review the fee schedule.
The Foreign Securities Fee is generally charged when opening a position in foreign stock and when closing that position. The fee is usually charged as a flat rate of anywhere between $25 and $50 per side, and the fee is not usually tied to the number of foreign shares purchased.
It is important to note that not all foreign securities are subject to the Foreign Securities Fee, as it depends on the exchange that they are traded on. The type of foreign stock is also a deciding factor.
Here are the affected foreign stocks and details on how and when the Foreign Securities Fee is charged.
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Types of Foreign Stocks
It is possible to invest in foreign stocks in the form of American Depository Receipts (ADRs, Foreign Ordinaries, and foreign stock ETFs.
American Depositary Receipts (ADRs)
ADRs are certificates that represent stocks of foreign companies, and they are listed on stock exchanges by local (U.S.) banks. Although ADRs follow the valuation of the companies that they represent, they do not incur any additional foreign securities fees, thanks to local nature of them.
Foreign Ordinaries (traded on the U.S. OTC market)
Foreign stocks can be bought in the U.S. directly on the OTC market. While there are some risks associated with trading foreign stocks in this way, such as less volume (liquidity), wider spreads, and impact from global economic conditions.
Foreign securities fees are also charged for the purchase and sale of these types of stocks.
Foreign Ordinaries (traded on foreign exchanges)
Trading Foreign Ordinaries on foreign exchanges is also possible. However, each broker has a slightly different method of making these types of trades possible, if they are willing to do it at all.
To trade foreign stocks on foreign exchanges, the broker will usually place the order with the foreign exchange. Other brokers, such as Fidelity, will allow investors to search for and place orders for foreign stocks on foreign exchanges, but they must do so with foreign currency. As a result, there are usually fees for the various services involved.
How to Avoid the Foreign Securities Fee
The easiest way to avoid the Foreign Securities Fee is to shy away from buying and selling foreign ordinaries on the OTC market.
There are many other ways to add a global perspective to an investment portfolio that do not come with the same risks, limitations, and fees. The simplest ways to invest in foreign companies and industries is through foreign stock ETFs and ADRs.
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