Many UK traders and investors buy US shares, and it is easy to see why. American markets are home to the world’s biggest technology companies and much of the excitement in global equities. What often gets overlooked is that buying a US share is really two decisions at once: a view on the company and an exposure to the dollar against the pound. Ignoring the second part can turn a good stock pick into a disappointing result, or flatter a poor one.
How the currency gets into your trade
When you buy a US share with pounds, your money is converted into dollars at the prevailing exchange rate. The share is priced in dollars, rises and falls in dollars, and when you sell, the proceeds are converted back into pounds. Your final return depends on both the share price move and the change in GBP/USD over the period you held it.
Here is a simple example. Suppose a share rises 10 per cent in dollar terms while you hold it. If the pound strengthens by 8 per cent against the dollar over the same period, your gain in sterling shrinks to roughly 2 per cent. If the pound weakens instead, your sterling return will be larger than the share’s own move. The company did exactly the same thing in both cases. The difference came entirely from the currency.
Why traders miss it
Most trading platforms show your position in the currency of the share, so it is natural to focus on the dollar price. The currency effect only becomes obvious when you check your account balance in pounds and find that it does not match what the chart suggested.
There is also a psychological trap. When the pound weakens and your US holdings rise in sterling terms, it is tempting to credit your stock-picking. When the pound strengthens and your returns lag, it is tempting to blame bad luck. Neither view is accurate if you are not separating the two sources of return.
When it matters most
Currency risk is always present, but it matters more in some conditions:
- When GBP/USD is moving sharply, for example around Bank of England decisions or major US data.
- When you hold positions for weeks or months, giving the exchange rate more time to move.
- When your portfolio is heavily concentrated in dollar assets, so currency swings affect most of your money at once.
For short-term trades lasting minutes or hours, the currency effect is usually small relative to the share’s own move. For longer-term holdings, it can be a major driver of the result.
Spread bets and CFDs are different
It is worth knowing that many UK spread bets on US shares are priced in pounds per point, which means your profit or loss is calculated in sterling based on the points the share moves. That removes the conversion on profits, but it does not remove every currency consideration, since the underlying market is still driven partly by dollar flows. CFDs on US shares, by contrast, are often denominated in dollars, so profits and losses are converted back to pounds. Check how your broker handles this before you trade, and look at any conversion fees too, as they quietly add to your costs.
How to think about it properly
The first step is simply to be aware of the exposure. When you buy a US share, ask yourself whether you are comfortable holding dollars for the same period. If you have a strong view that the pound is likely to rise, that should affect how attractive the trade looks.
Some investors choose to hedge currency risk, either by using currency-hedged funds or by taking an offsetting position in GBP/USD. Hedging has its own costs and is not always worthwhile, but it is an option if the currency risk is larger than you want. Others accept it as a source of diversification, since the dollar has often strengthened during global sell-offs, cushioning UK investors at the very moment US shares fall.
Above all, measure your results in the currency you actually spend. Separating the share return from the currency return in your trading journal is one of the clearest ways to understand where your performance really comes from.
Bringing it together
Buying a US share in pounds means you hold both the company and the dollar. Ignoring that second exposure can distort your returns and your judgement of your own skill. Be aware of it, decide whether you want it, and record it honestly.
Small blind spots like this one are what separate consistent traders from frustrated ones, and our free trader assessment is designed to help you find yours.
