Apr 092012
 

When you’re trading international stocks, it’s not only the charge for buying the shares that matter. The charge for buying the foreign currency the shares are quoted in can also be very significant.

At some stock brokers, this FX commission can be higher than the commission on stocks. And many brokers try to make their rates look better by hiding it deep in the small print or even not mentioning it at all.

This is particularly a problem in the UK, although investors everywhere should watch out for it. For example, take TD Direct Investing (formerly TD Waterhouse UK). It charges a standard rate of £12.50 per trade for international stocks. On an investment of £1,000, that’s a commission of 1.25%. But TD Direct will also charge up to 2% over the interbank rate for converting your currency – almost twice the headline stock commission.

To be fair to TD Direct, it displays its currency charges more clearly than many rivals. But while they may be transparent, they’re certainly not trivial. Charges like that will mount up pretty quickly, especially if you’re an active trader. So minimising your FX commissions is an important part of keeping your costs down and improving returns. Continue reading »

Should I use a foreign exchange specialist for currency conversion?

 FAQs
 

Investors often scrutinise a stock broker’s trading commissions very closely, but don’t think hard about other costs. That’s a huge mistake. You can end up paying a great deal more than trading fees when you’re investing in foreign shares.

One of the biggest yet best hidden costs are foreign exchange conversion costs. By that, I mean how much it costs you to buy foreign currency when your stockbroker settles a foreign share trade. Or what your bank charges to convert money and wire it to your overseas brokerage account.

In theory, these costs should be very low. Currency markets are highly liquid. The bid/ask spread in the interbank currency market is almost non-existent for major currencies. But financial institutions often stick a large margin on this when dealing with retail clients, figuring that most people don’t know what’s going on.

So it’s useful to know that FX costs can sometimes be cut dramatically. Doing so requires you to take control of what happens to your money and choose which firm you choose to do the currency conversion.

Let’s take a look at the details of how it works. Afterwards, I’ll run through a real example, and look at three risks to watch out for.

Continue reading »