Top 10 things you need to know about investing in the US

Investors are no longer confined to their home markets and now have easy access to exciting opportunities overseas. Here are the key points that will help you when buying shares on the US stock market.

Investing in North American markets is not only a great deal quicker, easier and cheaper than it used to be, but it’s also a no-brainer. US equities account for 60% of the total value of global markets, including many of the world’s most successful and enduring companies.

America remains the leading global tech powerhouse. Technology might be going through the mill right now, but we live in an increasingly tech-dependent world and it’s certainly not going away.

So what are you waiting for? Here are 10 things you need to know to start investing in the North American markets.

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1) Key markets and indices

The New York Stock Exchange (NYSE) and the Nasdaq are the two most important markets, with many tech companies listing on the Nasdaq.

If you want an overall market view, the key indices to be aware of are the S&P500, which tracks the share performance of 500 large companies listed in the US; the Dow Jones Industrial Average – one of the oldest stock indices and historically considered a bellwether for the US economy – which follows 30 of the largest US businesses; and the Nasdaq 100, which follows the 100 largest non-financial businesses listed on the tech-focused index.

2) US shares help diversification

If you’ve invested mainly in home-grown shares and familiar UK names so far, branching out internationally can really help in terms of diversification. Not only do the factors influencing markets differ between countries, but the kinds of business you can invest in will be different too.

Technology is the most obvious example in the US, accounting for around a quarter of the value of the S&P 500. In contrast, consumer goods, financials, healthcare and industrials dominate the FTSE 100, with technology accounting for less than 2% of the index. 

Bear in mind also that because a lot of large European and Asian businesses also list their shares on the US markets, you may find US investing provides a convenient route into those companies too.

3) Compare platforms

Not all platforms offer access to US shares, and some that do may charge more than for UK share dealing. interactive investor’s award-winning international dealing service offers full access to US markets, among many others, and charges flat fees with a free monthly trade for those on our most popular plan, which can be used for US trades. Additional trades cost £7.99. interactive investor has won ‘Best International Share Dealing Service’ at the Shares Awards every year since 2017, and ADVFN’s ‘Best Stockbroker for International Dealing’ every year since 2018.

4) Hold in a SIPP or ISA

Just because you’re investing internationally doesn’t mean you can’t hold your investments in your UK tax wrapper. You can channel up to £20,000 a year into an ISA, and up to £40,000 a year (or the equivalent of your annual earnings, whichever is the smaller) into a SIPP. US shares can be bought and held in both.

You can also trade through a trading account, though you could pay tax on dividends or capital gains you receive from these shares.

5) The W-8BEN form

Before you can start trading US shares you’ll need to complete this form, which is required by the US authorities to show which country you pay tax in. It will ensure you pay a reduced rate of tax on US dividends (normally 15% instead of 30%). W-8BEN forms remain valid for three years, but you don’t need one if you’re only trading through a SIPP wrapper.

You can find the form and instructions on how to fill it in here.

6) Exchange rate considerations

International share dealing has an additional dimension in the shape of exchange rates. Remember that the value of your US shares in sterling terms can be affected by movements in £/$ rates. Basically, when the pound is falling against the dollar you stand to gain if you sell them and convert the proceeds back to sterling, because your dollar-based US holdings will be worth more pounds than previously.

UK investors with US shares did quite nicely from that effect when the pound fell after the Brexit vote.

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7) Currency options

Because US shares trade in dollars, you’ll need to exchange currency if you want to buy or sell. You can do this very easily online as part of your transaction, in which case you’ll be charged a currency fee (ii charges up to 1.5%).

Alternatively, if you plan to build a portfolio of US shares, ii offers the option of converting a single lump sum to dollars and holding it in your trading account or SIPP. That way you avoid paying multiple currency conversion charges. You can also keep any sales you make in dollars, rather than automatically converting them back to sterling.

8) Market hours differ

Sounds obvious, but the time difference between the US and UK has a significant effect on when you can actually trade US shares in real time (although there’s nothing to stop you placing an order at any time and it will be executed when the market opens). The New York Stock Exchange is open between 2.30pm and 9pm GMT.

Remember also that many bank holidays are different across the pond.

9) US company shares pricier

You can typically expect to pay between £1 and £20 for a single share listed in the UK, but there are many US companies whose shares are much, much more expensive - running into the hundreds or even thousands of dollars.

The most expensive publicly traded share in the US is that of Berkshire Hathaway A shares, which hit an all-time high on 22 January 2022 at over $485,000, but NVR, AutoZone, Booking Holdings and Chipotle Mexican Grill are among those with shares worth over $1,000 each.

This does not necessarily mean the companies themselves are overpriced, but it means small investors may struggle to buy into such companies. 

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10) Index trackers for broad exposure

Of course, you may have your eye on specific US stocks for your portfolio, but many starting investors look for broad exposure to the main American market through an index tracker or exchange-traded fund (ETF).

Both options effectively do the same thing, which is to provide exposure to the companies in a particular index (or a representative sample of them), and then track their fortunes up and down.

There’s no manager selecting the best-looking businesses or looking for anomalies – it’s all done digitally, which means these funds can be very cheap. And, indeed, many experts say that the S&P 500 - comprising the US’s biggest companies – is so over-analysed that it’s very difficult for managers to add value in that way, so a tracker or ETF is the best bet. The ii Super 60 low-cost choice is the Vanguard US Equity Index, costing 0.1%; it gained 15% over the year to 28 January 2022.