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Shares: companies you own a piece ofrisk 4 of 5: high, can drop a lot

Foreign shares

Rules, protection and tax below are for European Union (baseline).

What it is

Part ownership of a company listed on a foreign exchange, bought either through your home broker or through an account abroad. The company is what it is wherever you live; what changes is the currency you are exposed to, the tax on the way, and the paperwork.

Currency risk cuts both ways and is the part people forget: a strong year for the shares can be wiped out by a weak year for the currency, and the reverse. Withholding tax on dividends is taken at source by the foreign country, and a treaty may or may not let you claim some back.

Buying abroad is how you escape a small or lopsided home market, and for most people a global ETF does it with none of the paperwork.

How it works

  1. Your broker converts your money into the foreign currency, buys the shares on the foreign exchange, and holds them for you.
  2. Each conversion costs a spread, and some brokers charge extra for foreign markets.
  3. Dividends arrive minus withholding tax; a tax treaty form can reduce the rate in advance.
  4. You report foreign income and gains at home, converted at the exchange rate on the relevant dates.

The honest pros and cons

For

  • Access to companies and sectors that do not exist at home.
  • Spreads your money across economies and currencies instead of one.
  • The same long-run growth as shares generally, from a bigger pond.

Against

  • Currency moves can add or remove 10 to 20 percent in a year on their own.
  • Withholding tax and treaty forms are fiddly, and unreclaimed tax is a permanent cost.
  • Foreign-market fees and currency conversion spreads add up for small trades.
  • Some countries restrict how much residents can invest abroad or require declarations.

Getting it in European Union (baseline)

not researched

Wherever you are

  1. Check whether a global index fund gives you the exposure you want without the paperwork; usually it does.
  2. If you buy directly, file the tax treaty form your broker offers before the first dividend.
  3. Keep the exchange rate on the day of every purchase; you will need it for tax.

Go deeper

Also called

international shares, overseas equities, US stocks, foreign stocks

Often confused with

  • Depositary receipt: A locally listed certificate that tracks a foreign share so you can buy it from home.
  • Domestic shares: Part ownership of a company listed in your own country.
  • Stock index ETF: A fund traded on an exchange that copies a stock market index at low cost.
Foreign shares in European Union (baseline) · wealth-coop