America remains the most popular overseas market for UK-based investors seeking international exposure. This is perhaps unsurprising given the combined capitalisation of US-quoted companies is $18.7 trillion according to World Federation of Exchanges statistics making it the deepest pool of equity capital on the planet.

Just looking at the New York Stock Exchange (NYSE) alone, the value of share trading in 2011 was six-times that of London’s, finds Charles Schwab, 4.5-times that of Tokyo, and 13-times that of Hong Kong. That means there’s a very high chance of finding a buyer or seller of any particular stock at any given time.

America’s stock market is home to many companies that are global leaders in their fields. No fewer than 173 of the constituents of the FT Global 500 list for 2012 were American, with a combined market cap of $10.4 trillion, $800 billion up on 2011. To put this into perspective, that’s nearly twice as many companies as the next three biggest nations - the UK, China and Japan - with a combined 96 featured businesses worth $5 trillion.

Consumer electronics giant Apple (AAP:NDQ) sits at the FT Global 500’s apex, worth roughly $416 billion, with Exxon Mobil (XOM:NYSE), Warren Buffet’s Berkshire Hathaway (BRK.A:NYSE) and Wal-Mart (WMT:NYSE) also in the top five (China’s PetroChina (601857:SS) is the one non American firm).

Reading through such statistics, it’s not hard to see the attractions for UK-based investors to give the US stock market more than a casual glance as we drove home in the first of this three-part series (see Cover, Shares, 4 Jul). Simply put, no other international financial market comes close to the size, accessibility, transparency and liquidity of the US stock market. It’s worth bearing in mind that tapping into the huge US equity arena flings open the door to a multitude of companies and sectors which have little or no equivalents on the London Stock Exchange (LSE). For example, many of the world’s biggest technology companies are US-based, where shares in household names such as Apple, Google (GOOG:NDQ) and Microsoft (MSFT:NDQ) can be traded on the NASDAQ or NYSE.

Tom Sowanick, a former Merrill Lynch chief information officer (CIO) who is now co-president of Omnivest, an investment advisory firm based in Princeton, New Jersey, reckons that there are ‘three good reasons why overseas investors should look at the US equities market’. Relatively low inflation - US inflation has largely tracked a narrow range between 1.5% and 3% for over 20 years, baring the odd lurch, according to data from the US Bureau of Labor Statistics. It’s currently (May 2013) running at 1.36%, compared to the UK’s 2.7%, based on figures from the Office for National Statistics. Sowanick’s second point is currency stability. The dollar remains the world’s tender of choice, and looks likely to stay that way for the foreseeable future. The investment advisor’s final argument relates to diversifying political and economic risk. This latter point is one that Raj Sharma, a private wealth advisor at Merrill Lynch Wealth Management in Boston agrees with, adding ‘while all the emerging markets put together have a market capitalization of $3 trillion, developed markets have a total market capitalization of $25 trillion’.

Back to basics

There are three main routes available for investors looking to put money into US shares. The first is the do-it-yourself (DIY) route offered by discount execution-only services including Charles Schwab’s One International account, designed to provide investors with comprehensive access to a wide range of investment instruments traded in America.

The three main routes

? Execution-only service

? Full-service broking house

? Advisory broking service

Investors can open the account from home by submitting an online application form along with copies of their passport, bank statement and a utility bill. The account can be opened with a minimum of $10,000, roughly £6,600 in local currency. But there is a bit of admin involved, such as submitting a W-8BEN form in order to claim beneficial ownership of the income from the account and any reduced tax benefits.

More detail is available in the accounts and services section of Schwab’s website (www.schwab.co.uk). Having opened the account, you can get access to the US securities market including stocks, mutual funds, exchange-traded funds (ETFs), options and fixed-income instruments, such as government or corporate bonds. Fees and commissions include a flat $8.95 charge per trade for stocks.

But there are many alternative options with several brokers based in this country offering UK investors access to this exciting potential, such as Alliance Trust Savings, Barclays Stockbrokers, E*Trade, Redmayne-Bentley, Halifax and TD Direct Investing. ‘Clients have access to US stocks, options, bonds, and American Depositary Receipts (ADRs),’ branch director Kully Samra explains (see page 38), which can be easily accessed from a computer or smartphone thanks to apps for both the iPhone and Android mobile operating systems.

The One International account also allows UK investors to use extended hours trading (EHT). Most US companies report financial results after the closing bell on the NYSE, tying the hands of many investors until early afternoon the next day, for UK-based investors this down time can prove costly given after hours grey market trading.

But EHT allows deals to be struck using the computerised order matching system called Electronic Markets. This provides a window of opportunity to place trades that run between 8:05am and 9:25am local time, and 4:15pm and 8pm. ‘EHT offers clients additional flexibility in the timing of their trades which can be useful for investors in the UK,’ explains Samra. However, he does sound a note of caution over the risks involved with EHT after-hours trading, such as a ‘lack of liquidity, wide bid/offer spreads and high volatility’.

The flipside to the DIY route is that you will not have the benefit of professional advice. If you are looking for a plain vanilla index fund, or feel confident in your own research capabilities, this might be good enough. However, if you are looking at stock picking, trading strategies and more complex operations, and are unaware of the dynamics or product varieties in the US market, this might not be the best option for you. For instance, you may not know enough about the stock market to make the best choice of stocks. Also, there may be tax implications you are unaware of.

Bells and whistles services

If you want advice you can approach a full-service broking house such as Bank of America-Merrill Lynch, Wells Fargo or Morgan Stanley. These provide a complete package from advisory services, to product sales to custodian services, so a one-stop shop for your US investments.

‘For novice investors, it is better to get professional advice while investing in the US markets,’ says Raj Sharma at Merrill Lynch Wealth Management. ‘There may be several legal and tax technicalities that overseas investors are not be aware of.’ For instance, certain investments are taxed while some are tax exempt. Another big area of concern for international investors is that of the US estate tax. ‘While we at Merrill do not offer legal and tax advice, we help the investor understand these issues and guide him to the right people so they may make informed decisions,’ adds Sharma. To open an account, you would need to submit the application form and required documents along with the W-8BEN.

Full-service broking houses have different models for fees, explains Sharma. ‘We offer various options here, a fee-based arrangement, a commission-based arrangement or a combination of both. This includes advisory charges, fees for product selection as well as custodian fees.’

Something to be aware of, however, is the global debate about the fee structure of full-service broking houses. Charles W Morten, an ex-JP Morgan and Merrill Lynch executive who is now chief of operations and compliance at investment advisory firm Omnivest, says: ‘There is always the question of conflict of interest in full-service houses where the broker, driven by commissions, might sell clients products that are in the broker’s best interest. Charge structures are very complicated and it can be difficult to evaluate how much your costs are likely to be.’ There have also been instances such as that of Madoff Investment Funds where client investments were used by the firm to earn profits. So you would need to do your due diligence before you choose your firm and advisor.

A third way that navigates a neat alternative to the above options is the advisory route, a hybrid combination of both the execution-only and full service choices. Here your advisor will charge a fee for advisory services and he will leave it up to you to make the product and platform selection. You are not obliged to purchase securities through your advisor so to that extent the element of bias is bypassed, although assistance is typically available for buying products if and when you ask for it.

The set of regulations for independent advisors is very stringent when compared with brokers. Old fashioned commissions for independent advisors are outlawed. Omnivest typically charges fees based on the size of the portfolio, while professional tax and legal advice should be available too.

The US markets present some great opportunities for investments. While being an overseas investor may make the process seem challenging, brokers are typically bending over backwards to provide help, particularly at the cut-throat execution-only end of the market where competition for your business is fierce. You need to keep in mind fees and commissions, quality of advice as well as ease of customer service. Pick the best option depending on your profile.

Risers