Adding some international stocks to your investment portfolio increases its diversification and gives you exposure to different national economies. The United Kingdom is home to some major global energy and pharmaceutical companies as well as smaller companies dependent on the U.K. economy. U.S. investors can buy stock in U.K.-based companies.
American Depository Reciepts
Shares of foreign companies can trade on the U.S. stock exchanges or over the counter -- OTC -- in the form of American Depository Receipts, or ADRs. ADR shares are backed by stock shares of a foreign company held in trust by a U.S. bank. Through ADRs, U.S. investors can easily invest in U.K. companies like BP, GlaxoSmithKline Plc or Lloyds Bank. ADR shares are bought and sold through any stock brokerage account in the same manner as U.S. stock shares.
Sponsored vs. Unsponsored ADRs
An ADR can be either sponsored or unsponsored. Sponsored means the foreign company supports the ADR listing and complies with U.S. financial reporting requirements. With unsponsored ADRs, shares to back an ADR are still held by a U.S. bank, but the foreign company does not support ADR shareholders. If an ADR trades on the New York Stock Exchange or Nasdaq, the listed ADR is sponsored. Both sponsored and unsponsored ADRs are listed on the OTC. At the time of publication, the ADR website listed 337 ADRs from U.K. companies, of which 157 were sponsored.
Foreign Stock Brokerage Account
Several U.S. discount stock brokerage companies allow customers to buy and trade international stocks in selected foreign markets. With this type of account, you would look up U.K. company share prices on the London Stock Exchange and place orders to buy the shares directly. Cash in your U.S. brokerage account would be converted to British pounds, and the shares would be purchased with the local currency. If you regularly trade U.K. stocks, you can keep a portion of your money denominated in pounds so you are not constantly converting money back and forth.
Buying the U.K. stocks with U.S. ADRs is the simplest way to invest in British companies. You pay your broker's regular commission rate, and any dividends paid by the U.K. shares are converted to dollars and deposited in your account. The limit to ADR investing is that not all U.K. companies list ADRs in the U.S. With an international investing brokerage account, the fees and commissions will be higher than when you buy U.S. stocks. Your U.K. stock investments will be valued in British pounds, which could be a positive or negative, depending on the relative U.S. dollar/British pound exchange rate.