Can UK residents invest in NASDAQ stocks?

Summary

  • UK residents can invest in NASDAQ to diversify their portfolio and widen their growth prospects by entering the US stock market.
  • Investments in NASDAQ can be made by taking help from a broker in investing in funds, and exchange-traded funds.

A diversified portfolio is the key to maximise profits in the long run. But investors should remember diversification is quite difficult if one doesn’t leave his or her home country and explore other options. The UK investors who invest in the London Stock Exchange are offered with a wide range of stocks across companies in various industries and sectors, but the LSE accounts for less than 4% of the total global stock market, while approximately 50% of the total global stocks are traded on the NYSE and NASDAQ in the US, which include a range of mega-cap companies with huge market capitalisations.

After NYSE and NASDAQ  is the second largest stock exchange in the world, with over 3,300 stocks. It consists of the largest technological giants across the globe, including the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google). Despite the global pandemic, the US stock market has demonstrated the best performance in 2020. While the UK’s FTSE All Share Index lost 18.3%, and Japan's TOPIX lost 6%, the S&P 500 has gained 5.3%, from 31 December 2019 to 7 August 2020. Also, the NASDAQ 100 has returned a significant 30.2% year-to-date. Thus, the UK investors are interested in US stocks, especially to strengthen their portfolio amid the pandemic.

Also read: Focus on 3 FTSE housing stocks as UK house prices soar in June

How to invest in NASDAQ?

The UK investors can invest in NASDAQ through several ways. The US stock market is accessible to UK residents via many share-trading platforms and brokers. The investors can either buy the stocks that are individually traded on the NASDAQ, or else they may invest in index or tracker funds which reflect the NASDAQ’s stock performance.

The first step for UK investors before investing in US stocks is to understand the concerns regarding the tax rules, fees and charges, and exchange rates for conversion of pound to US dollar in the US stock market. A suitable broker or a trading platform must be chosen, after considering all the factors, like account options and fees. Once an account is opened with a share trading platform or a broker, the most important thing to do is to file Form W-8BEN with the US Internal Revenue Service (IRS), as no investor can buy shares in US without fulfilling this requirement. This form can be filled online and will certify that you are not a US resident. Thus, the tax benefits can be assessed accordingly, as all non-US investors are subject to 30% US tax on income they receive from US sources, like dividends payable on US securities. Filling this form can help UK investors get US tax reduction, as UK and US have a double taxation treaty, which in turn provides tax relief to UK residents and helps them save up to 30% tax on the income derived from US stocks. If the US investments are held in a Sipp or qualifying pension scheme, then this form is not required.

Also read: 10 FTSE tech stocks to look at in August 2021

It is important to understand the charges for buying US stocks, such as commissions and conversion fee. Platforms like IG, Interactive Investor, AJ Bell, and Hargreaves Lansdowne etc. help the UK investors for such comparisons and helps in the investment process. For example, if you choose IG as the provider, it will automatically convert your pounds into US dollars, and will charge a foreign exchange fee of just 0.5%. If your deposits are left in pounds, then the foreign exchange fees will increase your overall cost. After reviewing and choosing the suitable shares for according to your preference, the IG share dealing service will help you buy the US shares as and when you deposit your funds. The dividend payments from the shares you hold will then directly be transferred to your IG account.

It is also important to monitor your shares regularly if you’re trading CFDs, as they are very volatile and around 70-80% of investors lose money because of CDF products, but if you’re trading ADRs or GDRs, then tracking your investments every minute isn’t necessary.

For successful investing, the choice of a suitable broker or trading platform play a crucial role. As mentioned in the above example, some may only charge a foreign exchange fees, and no commission on trade. But some may charge commissions on every trade. Thus, it is important to analyse the costs and fee structure of all platforms beforehand.

Other ways to invest in NASDAQ

Other than using a broker, or investing in funds, buying Exchange Traded Funds, which track the performance of the whole NASDAQ index, as well as indices such as the Dow Jones Industrial Average and the S&P 500, is another way to invest in NASDAQ without directly buying the NASDAQ stocks.

Also read: Which were the top dividend paying FTSE stocks in Q2?

Some very popular NASDAQ tracker funds, which are offered by the UK trading platforms and brokers include First Trust NASDAQ-100 Equal Weighted Index Fund (QQEW), Invesco DWA NASDAQ Momentum ETF (DWAQ), Fidelity NASDAQ Composite Index Tracking Stock ETF (ONEQ), and ProShares Equities for Rising Rates ETF (EQRR) etc.

Both the NASDAQ-100 index tracking at the top 100 non-financial stocks on NASDAQ, and the NASDAQ Composite (IXIC) tracking the common stocks and securities on NASDAQ, can be invested in by buying an ETF that mirrors the performance of stocks that are a part of these indices.

Investing in NASDAQ will help you diversify your portfolio and widen your growth prospects, but there are still risks associated with investment in foreign shares, such as currency exchange rate risks, along with fees and taxes. Altered trading hours may also create issues, so it’s important to keep in mind that NASDAQ is open during the regular US market hours, which are 9:30 am to 4 pm (Eastern Time), Monday to Friday.

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