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Best Brokers for US stocks in Europe: Zero Commission isn’t the same as Free

Franklin Carneiro da Silva| Updated May 9th, 2022

As economists like to say, there is no free lunch! Investing can be expensive, even if you do not notice it at first glance. In this article, we will explore the true costs of trading US stocks for European investors.

What is the impact of fees on investors’ performance?

According to the 2021 report “Performance and Costs of EU Retail Investment Products”, made by the European Securities and Market Authority (ESMA), the gross performance (excluding fees) of retail investors diverged from the net performance (including fees) by 1-2% on an annual basis (depending on asset classes). This means that, on average, fees eat away your returns by 1-2% every year.

The fees calculated in this ESMA report include the trading fees charged by the brokers and the fees inside each product, such as the Total Expense Ratio (TER), which comprises most of the costs of running an ETF or Mutual Fund.

As with some trading costs, the TER is not directly visible in your trading account, as would be a grocery expense in your bank statement. The Securities and Exchange Commission (SEC), the US regulator, has even produced an investor bulletin where you can clearly spot the impact of these expenses on your portfolio over time.

As you can see, fees are one of the most important determinants of investment performance and are something every investor should focus on.

The Costs associated with trading US stocks

  • Spreads: The difference between the ask and bid price (the former is higher than the latter). You should look at the ask price when buying a stock, and the bid price applies when you want to sell. The spread is what the broker or market maker earn in profit from managing a stock trade execution. The higher the liquidity, the lower this spread should be. So, trading a stock in the S&P 500 or NASDAQ 100 should be relatively cheap.
  • Commissions: It is a cost associated when trading a share, either buying or selling it. This is a direct cost that pops up on your trading confirmation window. So, this is the most visible cost and the one you probably focus on more. In reality, it is not the biggest one – as we’re about to show you.
  • Currency exchange fees: Since US stocks are traded in USD, a non-US investor will have first to convert their base currency (EUR, GBP, CHF,…). This exchange is usually done inside the platform you are trading and automatically. Let’s say you want to buy XYZ company, trading for $100 a share. If the EUR/USD is at 1.2000 USD and the currency exchange fee is 1%, you would need 84.18 EUR, whereas, with no currency conversion fee, you would only need 83.33 EUR. Not a big deal today, but little by little … From our experience, this trading cost may have the most significant negative impact when trading US stocks.
  • Other costs:
    • Non-trading fees: account maintenance, account transfer, account inactivity, wire transfer and others;
    • Third-party fees: Regulatory, Clearing, Exchange and Pass-Through fees (small amounts and not related to the broker. Your broker earns nothing from here.)

Cheapest Brokers for trading US stocks in Europe and the UK – Research by Interactive Brokers

Interactive Brokers analysed the main costs of trading US stock from Europe and the UK using data from different providers as of the 6th of December 2021. The results show the impact of trading different amounts across several competitors.

Comparison of Brokerage Costs for European investors

Comparison of Brokerage Costs for UK investors

One thing you quickly notice is that the fees increase exponentially with the amount invested, except for Interactive Brokers. Besides, under the column “US STOCK COMMISSION” (the explicit cost we talked about earlier), you can see that, usually, this cost is relatively low (even 0% for some platforms), which means that the currency conversion costs are the ones that fill the gap!

Please also note that, for smaller investment amounts, the study results would be different. Interactive Brokers charges a minimum forex conversion fee of USD 2.00, which means that other brokers could be cheaper for investing in US stocks for smaller investment amounts.

There are many footnotes in the image (12!), so we highly advise you to visit their page to understand the study better.

Despite only presenting analysis for EUR and GBP based investors, the same logic would be valid for other non-US investors.

The takeaway

As you can see, the costs of investing in US Stocks don’t include only commissions (fee for buying or selling a stock/opening or closing a trade) but also currency exchange fees and other fees (e.g. regulatory or clearing fees). Usually, the currency exchange rate is the fee that makes the most significant difference in total investing costs when comparing the costs of various brokers.

Regardless of the US stocks you may be interested in, pay attention to how much you spend. This includes both explicit and not so clear costs. By keeping an eye on your trading charges, you can save more money on your side.

Before opening an account, think about your expected needs for the future. Are you looking for only US stocks? Interactive Brokers may be a good option. Do you plan to trade ETFs or European stocks? Other alternatives could be considered.

Are you still scratching your head? Feel free to ask us any questions in the comments section below!

Franklin Carneiro da Silva
Co-Founder & Fintech Analyst

Franklin is a CFA Level III Candidate with 3 years of experience in Wealth Management as a Fund Research Analyst and the Host of the "Edge Over Hedge" YouTube Channel.

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