How to trade on the London Stock Exchange

The London Stock Exchange (LSE), with a market capitalization of $4.04 trillion, is owned by the (LSEG) London Stock Exchange Group and ranks seventh in the world’s most extensive stock exchanges list.

The chances that you will be able to trade on the London Stock Exchange are pretty high if you choose the right online broker, although your physical location also plays a vital role hereзическое.

When you buy foreign stocks, the ability to trade them is just as important as choosing the right broker.

Introduction: trading on the LSE

The London Stock Exchange, one of the world’s first stock exchanges, has a rich history since 1571, when the Royal Exchange was founded.

In 1986, there was a change in the regulation of financial markets in the United Kingdom, commonly referred to as “Financial regulation” (Big Bang).

At the same time, it abolished fixed commissions, and the exchange switched to electronic trading from the screen, ending the traditional verbal communication system (Open Outcry).

In 2004, the Royal Exchange moved to a new building, as the old Exchange Tower structure was outdated.

In 2007, LSEG was formed after the merger of the LSE with Borsa Italiana.

To join LSE includes the following divisions

• The primary market. The place where shares of the largest and most famous companies in the UK are traded. As of 2022, the primary LSE market consists of more than 1 000 British and international companies with a total capitalization of 40,40 billion pounds;
• The Alternative Investment Market (AIM). AIM was launched in 1995 and has become the world’s most successful growth marketplace, with more than 3,500 tickers registered. This international market is designed for smaller and growing companies. It trades businesses from the early stage to venture capital financing and some older companies;
• Professional Securities Market (PSM). PSM allows companies to raise capital by placing securities, such as depositary receipts and promissory notes.

The LSE Turquoise Derivatives (TQ) platform allows real-time trading of stocks, debt instruments, and derivatives for Norwegian stocks and indices, short-term interest rate futures (STIR), and three-month Euribor and Sterling futures.

Long-term Interest Rate Futures (LTIR) such as Bund and Long Gilt are also available for trading.

The main trading methods are also availableи on the LSE

• Method one: opening an account with one of the international brokers, Forex.com;
• Method two: create an account with a foreign exchange broker;
• Method three: purchase of LSE shares in the form of American depositary receipts (ADRs);
• Method four: Trading LSE stocks in the form of Contracts for Difference (CFDs).

Let’s take a closer look at them.

Method one: opening an account with one of the international brokers

For participating in trading on the London Stock Exchange, it is more convenient to create an account with an international broker with a representative office on the LSE, which will allow you to make transactions on this exchange for your clients.

If you have sufficient funds for the minimum deposit, you can open an account with Interactive Brokers, regardless of where you live.    

One of the best international brokers, Interactive Brokers, has a membership in the LSE, an office in the UK and provides traders with one of the best trading platforms and excellent margin rates and low commissions.

Using the International Order Book (IOB) of the LSE exchange, Interactive Brokers provides traders worldwide access to global depositary receipts (GDRs) backed by LSE shares.

Residents of other countries can also buy LSE shares through Interactive Brokers’ official website, using depositary receipts (ADRs) traded on US stock exchanges.

The choice of ADR may be limited to large UK companies if they are listed on the New York Stock Exchange (NYSE).

It can purchase most of the GDRs on LSE stocks available at Interactive Brokers directly for US dollars, but in some cases, you need to pay in EUR or GBP to buy them.

At Interactive Brokers, you can open and maintain your account using multiple currencies, making foreign trading stocks accessible.

Exante and Just2Trade are reputable brokers t00 that give clients access to foreign stock markets.

Here are someе of our favourites

Broker	Best for:	Commission	Min. size invoices
Just2Trade	– Active traders; – Mid-level traders; – Advanced traders	0.14% per trade minimum 0.01$	$100
Exante	– Mobile traders; – Traders who need some research and data; – Investors who need help with pension planning	0.05% per transaction	10 000€
Interactive Brokers	– Forex Traders; – Professional traders; – Traders, who need many different types of orders (there are 63 of its here)	$0.005 per share, minimum of $1 and maximum 0.5% of transaction value;      Traders available discount by volume	$10 000

 Method two: create an account with a foreign exchange broker

Many excellent online brokers have branches in the UK and full LSE membership.

Those outside the US will probably have no problem finding a UK stockbroker to buy stocks on the LSE. 

But if you are a US citizen, finding a foreign stockbroker with access to the LSE who will accept you as a client can be more difficult.

CURRENTLY, the US government prohibits its citizens from sending money only to Cuba, North Korea, Syria, and Iran. No one will ask where you send your money if you declare foreign accounts and pay taxes.

Problems can arise with stockbrokers outside the United States, who often refuse to accept American clients due to this country’s high costs and strict laws.

Under the Securities Act of 1933, the US Securities and Exchange Commission (SEC) prohibits financial institutions not registered or regulated by the SEC from contacting American investors and negotiating investments with them.

Instead of registering with the SEC and being subject to the SEC’s strict requirements, most online brokers and foreign banks take a more straightforward approach, simply prohibiting US residents from opening accounts.

However, it can find a few exceptions; for example, Saxo Bank is based in Denmark and Swissquote.  

Method three: purchase of LSE shares in the form of American depositary receipts (ADRs)

While UK residents trading on the London Stock Exchange is available through their local stockbrokers, US residents can receive LSE shares in ADR (this is how foreign shares held in trust with US banks are designated).

This method allows you to trade most large-cap LSE stocks, such as BP, Lloyds Bank or GlaxoSmithKline, which are considered “sponsored” due to its presence on major exchanges such as the NYSE or NASDAQ.

The US OTC market also allows you to trade cheaper LSE-listed stocks.

LSE shares not traded as ADRs on significant exchanges are generally sold through OTC platforms and are considered “unsponsored“.

It can find these promotions in the so-called “pink sheets”, which can be accessed through the Over the Counter Bulletin Board (OTCQX) system.

ADRs on LSE-listed shares are traded similarly to exchange-traded or OTC shares.

It can access them through any reputable American stockbroker, including brokers that offer commission-free stock trading, such as Robinhood.

Method four: trading LSE shares in the form of CFDs

CFD contract is a derivative product that allows you to trade financial instruments without owning the underlying assets or shares.

CFDs also allow you to open long or short positions on stock indices, such as the Financial Times Stock Exchange (FTSE) index or shares of specific companies listed on the LSE.

CFD contracts offer traders certain advantages and allow them to use the popular trading platform MetaTrader 4, which supports automated trading.

In addition, another advantage of trading CFDs, if you live in the UK, is that you do not have to pay the standard stamp duty of 0.5%, which is charged if you buy shares while trading on the London Stock Exchange traditionally.

You can also access a wide range of tradable assets through CFDs unavailable from traditional stock brokers.  

British brokers that offer CFD trading include Plus500, Forex.com, Admirals and eToro.

Under SEC rules, it can only do trading in instruments such as CFDs on a regulated exchange, but no US exchange currently has CFDs.

But CFD trading is offered by some foreign brokers that accept clients from the United States. For example, the social trading platform Zulutrade allows American traders to trade CFDs through 4 US-registered Forex brokers: FXCM, FXDD, FOREX.com and CytyIndex.

In addition, CFDs are available to American clients through the international broker Oanda.

Conclusion

British traders have no problem buying shares on the LSE through a local broker, but residents from other countries may have difficulties.

The best solution for American traders is brokers like Interactive Brokers or Charles Schwab.

It can be tricky for the average trader to make the minimum Interactive Brokers deposit of $10,000.

Charles Schwab requires an even higher minimum deposit of $25,000 to open a Schwab One International account, which will allow you to buy shares directly on the LSE at a reasonably high commission.  

Although it may be possible for American investors to open an account with a foreign broker or CFD broker, the best option is to buy ADR on LSE shares through a regular brokerage account.

When purchasing ADR using a Schwab account, you will only need to pay the share price and a commission of $4.95. You can even use a commission-free account to purchase ADR. However, please note that not all LSE shares are available as ADRs.

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