What Works: Schwab Leads Pack for Foreign Stock Trading

In this online world where convenience and cost are considered the be-all and end-all, it's important to recognize that these factors aren't the end-all, all of the time.

Trading foreign stocks is one of those times.

For my ongoing series on international investing (it started Wednesday with this column), I've studied some of the various ways to trade foreign stocks through discount brokers. The What Works assessment? Unless you're extremely savvy about the precise security you're looking for and the vagaries of its particular market, trading foreign stocks through your PC is probably not worth the benefit of a cheap, point-and-click commission.

What Works in Overseas Investing

Getting Started At Trading Foreign Stocks

Coming Up:

Funds, ETFs, and Other Ways to Buy Baskets of Overseas Stocks

Best Sites for Foreign Investing Info

The service I like the best for trading foreign securities is actually the least high-tech: Schwab, with Fidelity second. Unlike other full-service discounters and niche international brokers, Schwab forces you to complete foreign stock transactions with one of its reps, person to person. That costs you commission-wise. But Schwab also has a dedicated international brokerage staff bent on making this human interaction worth the time and extra money.

Today, I review Schwab's offering, along with two niche international trading sites -- Intltrader.com and Globeshare -- as well as some other full-service discounters. Next week in this continuing series, I'll look at sites and services for diversified international investing (closed-end funds, exchange-traded funds, etc.) and, separately, news and information sites. Please stay in touch about whether you agree or disagree with an email to [e-mail].

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Hype Vs. Reality

It couldn't get much better PR-wise: "International trading online marries the globalization of world markets and the convenience and cost of the Internet." It's the basic mission of sites like Intltrader.com and Globeshare, and to some extent reflects the approach of full-service discounters. Maybe one day it will even come true. But it's not there yet.

The problem is that trading "foreign ordinaries" (shares issued on a local foreign exchange) and to a lesser extent, unlisted American Depositary Receipts (or ADRs, which are a U.S. form of a foreign stock), isn't as straightforward as trading regular U.S. stocks, and the info available online on these foreign securities is not nearly comprehensive enough for most investors to make good decisions on their own. (For more on foreign ordinaries and ADRs, see Wednesday's column.)

For these reasons, I favor broker services that have live, experienced help, even if -- indeed, perhaps better -- they force you to use it. It may sound "old world," but it's only because I don't see the new world as ready for prime-time yet.

The Brave New World: Niche International Sites

Intltrader.com

Intltrader.com enables individual investors to get "firm," or executable, quotes on foreign stocks that come from the site's sister company, International Assets Advisory Corp., a U.S. market maker in international stocks. The online commissions are reasonable at $29.99 for up to 5,000 shares, and the quotes are in U.S. dollars. At Schwab, a broker-assisted trade of a foreign ordinary -- the only way Schwab lets you do it -- starts at $39 and goes up depending on the size of the trade. (Here's the commission schedule.)

At Fidelity, broker-assisted trades start at $59 and also go up from there. (Here's the Fidelity schedule.)

Intltrader.com also offers competitive commissions on U.S. stocks ($14.99 market/$19.99 limit orders). Finally, one reader reports "responsive and reliable" customer service, and I found a rep helpful, too, when I called.

It all sounds good, but when I toured the site myself, I encountered a few annoying shortcomings that left me feeling this site, which only handles about 1000 accounts now, is still getting its legs. First, when I tried it earlier this week, the quote lookup was confusing. It was divided between U.S. and international sections, but the international tool yielded U.S. symbols. Later in the week, they combined the two functions into a single symbol lookup. Still, for a site like this that's been in operation over a year, that's not a feature that should have taken this long to straighten out.

I then looked up Japanese firm Softbank. The quote put the bid/ask at $60.280/$64.220 and the close at $42.5 -- a whopping difference. The firm explained that there apparently was a caching problem with a server that was causing older information to be displayed incorrectly, and that they were fixing it.

Next, I looked up Telecom Italia Mobile SPA, a major Italian mobile-phone company. Though "research" is a drill-down choice from the quote, an attempt to get a report yielded a "research report cannot be found" message, with a URL indicating a lookup at Wright Investors' Services. When I went to Wright at www.wisi.com, the report was there.

Another disappointment: The "stock finder" screening function only works for U.S. stocks. And the online commission schedule has asterisks that do not lead to any explanatory information.

These may not be the most dire problems ever encountered on the Web. But if it were my money in these kinds of markets, unless I was extremely self-directed, this young site would be a wait-and-see.

Globeshare

Globeshare differs from Intltrader in that its quotes are from local exchanges in local currencies, rather than a dollar-based U.S. market maker's quote. Its proclaimed selling point is that it has relationships in local markets that enable it to place trades directly through local exchanges, rather than through market makers, who charge a mark-up on the deal.

Globeshare maintains that this approach is cheaper. And someone unrelated to the firm, Steven Chandler, VP of global trading at Schwab, says that local exchanges do tend to be cheaper because U.S. market makers charge a risk premium for trading a stock while a local market is closed.

Still, presuming there is cost savings to be had, the site did not jibe with my "keep it simple" philosophy. It may be neat to trade when the local market is open and use local quotes, but for most retail U.S. investors a dollar-based quote is just easier. Plus, the commission schedule was a real brain-twister. Sometimes, for example, it indicates the commission is an unidentified percentage of the principal. The firm says that's for cases where it either doesn't have an established broker relationship for the locale, or because there's room for negotiation with the relationship they do have.

While you'll be told the commission before you place the trade, I still prefer a cleaner scheme.

Full-Service Fare

All of which brings me to Schwab and Fidelity. What I like best about these firms is that, unlike other big online brokers, they have brokers specially trained in international securities. Other firms say all of their brokers are capable of handling international transactions, but with this tricky stuff I'd want to work with someone with special knowledge. If you call Schwab or Fidelity to place a foreign trade, you should be routed to folks who can help you work through some of the subtleties I discussed in the first installment of this series.

One thing nice about Fidelity, and it applies to CSFBdirect and E*Trade as well, is that you can find symbols for foreign ordinaries and unlisted ADRs in their quote lookups. Schwab's quote lookup doesn't do that. And while both Fidelity and Schwab permit trading of unlisted ADRs online, Fidelity also permits online trading for some foreign ordinaries. Schwab doesn't, except for Canadian stocks.

Still, my nod goes to Schwab. What Schwab foregoes in technology, it makes up for in service. It has about 30 folks on its global investing services team to assist customers, compared with 15 at Fidelity. While Schwab's desk is open from 8:30 a.m. to 11 p.m. ET, Fidelity's is only 8 a.m. to 4:30 p.m. Schwab even gives clients the option, where possible, of placing the trade through a U.S. market maker or having it handled overnight in the local market.

And while every broker I spoke with insisted that they do not give advice, Schwab's VP in this area, Chandler, unabashedly says the firm "definitely" gives advice because of the complexities of trading these markets.

Indeed, Schwab contends those complexities and risks are the reason it doesn't permit trading of foreign ordinaries online -- it wants to make sure its clients understand the issues. It's possible that rationale is partly an excuse for being behind the ball techwise. But with these markets, I'd rather see a firm be more conservative than see it put out tools that either don't work or that give just enough info to enable someone to act, without giving them enough to act wisely.

Next Week/Chat Time

Next week I focus on closed-end funds, exchange-traded funds, and other ways to buy baskets of overseas stocks. Separately, I'll write about the best sites for foreign investing info.

Please send email on this series to [e-mail]. And please join me and my colleague, Mark Ingebretsen, for a chat about online brokers on Thursday, March 15 at 4 p.m. here on TSC. I'll take questions on international investing, as well as general issues of selecting and making the most of online brokerage services.