The Right Way To Buy International Stocks

Discount broker Charles Schwab charged me $850 in commission on one trade. It's true.

More amazingly, that trade carried a "hidden" charge of $500 on top of that... for total fees of $1,350. 

So when does a discount broker charge total fees (including hidden ones) of more than $1,000 for a trade? When it's an international trade, of course!

Let me tell you what happened... and then I'll explain how to avoid this type of thing happening to you.

In late 2005, I wanted to buy, through my IRA account, about $30,000 of a stock that trades in London. I know that Schwab has a long history of trading international stocks. I'll admit it, I simply didn't want to go through the hassle of transferring the money to another firm and opening another IRA just to own one stock. So I stuck with Schwab for this trade.

I told Schwab what I wanted to buy. It took them a few days, but they got back to me saying they could buy the stock. I placed my order. When I got my confirmation, I couldn't believe it...

The price Schwab filled my order at couldn't have been worse... I had figured in advance that if I got the worst price of the day for the stock, the total cost of my shares would have been $32,900 before commission. Instead, Schwab charged me $33,400 – $500 more than the worst prices of the day. (I call that $500 difference the "hidden" charge because I don't know what it is. It could be some sort of markup. It could be that Schwab got ripped off on the exchange rate, or something else. I don't know.) And then came the $850 commission. 

I'm sure they have some sensible explanation... but you've got to admit, an $850 commission on one trade at a discount broker still sounds like a lot in a world of $12.95 commissions.

In the end, it's worked out for me, as I'm up more than 100% on that stock in 16 months of holding it. But as you might guess, I haven't placed an international trade through Schwab again. I should have known better...

I started my career selling international stocks and bonds. So I know the best guys in the business. And I know the pitfalls of trading internationally. I knew what to ask Schwab.  But I didn't ask them, and I got burned a bit in fees.

I bring all this up because E*Trade announced today it is getting into the foreign stock business. Yes, you are now able to buy shares in Japan online, while sitting at home in your boxer shorts, just like they were any other stock.

E*Trade announced it is starting with six markets (Canada, France, Germany, Hong Kong, Japan, and the U.K.). It says it hopes to include as many as 42 international markets in the future. 

This is good news... and bad...

Schwab has been trading international stocks for years, and my one experience wasn't great. The Wall Street Journal reported today that online trades in Germany and France on E*Trade will cost around $21 in commission. It sounds cheap... but will there be $500 of hidden costs and markups as well? We'll see...

I stick with the guys who have experience... guys like Rick Rule of Global Resource Investments (www.gril.net). Rick often buys for his customers overnight in the local market at the local price. He doesn't try to make a profit off the exchange rate or add a markup. I don't see $500 disappear mysteriously, in addition to the commission. You simply pay a commission, which Rick is entitled to – it's his fee for making this thing work, and my insurance policy that if it goes wrong, Rick will fix it.

It sure is nice that when you have a problem, you can talk to the same person at that firm and that person actually knows what he's talking about.

Another good option is a firm like EverBank. The origins of EverBank go back a very long way in doing international trades. I've known these guys for more than a dozen years. Like Rick, they have experience in trading international stocks and bonds and getting good exchange rates. EverBank only charges a flat fee of $50 for international trades – and these are broker-assisted trades! Not online trades!

My father's firm also specializes in international stocks and bonds... They have been doing it for about as long as international stock and bond trading has been a reality for individual investors in the U.S. They know what they're doing, too (www.keywp.com).

Yes, it's a big day when the big discount brokers are finally getting into the world of trading international stocks. It's not just Schwab and E*Trade, either – Fidelity and Interactive Brokers do some international business too. But beware, it could be a blessing and a curse...

1) Make sure you ask plenty of questions about the fees you'll have to pay before you get involved;  

2) Make sure you're confident that the folks you're dealing with will know how to handle a problem when it arises... because problems show up often in international trades; and

3) Make sure you check what the local prices were and the local exchange rates were to see how your broker did on your order. Better yet, place the same trade with a few different brokers if you can, to see who gets you the best fills on these trades.

Discount brokers trading international stocks present both an opportunity (cheap commissions) and a risk (that they really don't know what to do when things don't go right, which happens all the time).

Right now, when I can do $50 broker-assisted international trades through EverBank or deal with good folks like Rick Rule or my dad, the potential for saving a few bucks in the short run is simply not worth the risk of "hidden charges" and novice international traders.

I can tell you from experience of having worked in a firm that specialized in international stocks and bonds that if something can go wrong, it will.

The best advice here is, let international trading at E*Trade get through its freshman year. Then consider trying it. For now, stick with the tried and true, and make sure you're looking out for yourself with the three things above.

Then you'll be able to successfully trade international stocks.