How to invest in the LSE from Canada

• Learn about investing in securities listed on the London Stock Exchange.
• Find out how to invest in LSE ETFs, index funds, and shares.
• Compare LSE online brokers and set up your first order.
• Get the pros and cons of investing in the LSE.

The London Stock Exchange (LSE) is the UK’s largest stock exchange, and currently the 8th largest in the world when measured by market capitalization of the securities listed on it. The total market capitalization of the listed securities is more than £3 trillion.

Investing in the LSE is a likely starting point for Canadians new to the idea of investing in shares and ETFs.

As well as the main board (LON), where the largest established companies are listed, the LSE also has a sub-board, the Alternative Investment Market (AIM), founded in 1995 to help smaller companies access capital from the public rather than just private sources. This guide will be confined to discussing investment in the main board of the LSE.

Before you begin, you’ll need to know the types of LSE investments available to you, which online share brokers you can use, and the pros and cons you should be aware of.

The LSE is an exchange where financial instruments – such as equities, commodities, and fixed interest bonds – are traded.

You can’t invest directly in the LSE by buying a share of it (although you can buy shares in the company which operates the LSE, the London Stock Exchange Group plc). Instead, you can invest in exchange traded funds (ETFs), index funds, or shares of individual companies listed on the LSE.

Exchange Traded Funds

ETFs are investments that pool cash created by selling units in the fund and investing it in a basket of securities – such as shares, fixed interest bonds, and commodities. Each ETF aims to track a particular market index, industry, commodity, or investment strategy.

ETF units can be bought and sold on the stock market similarly to company shares. The unit prices constantly change during the trading day but generally show less fluctuation than individual company share prices. This makes them a way of spreading risk. Because they are less risky than individual shares, an investment in ETFs is less likely to record significant losses or gains in the short term. Investing in ETFs is a strategy for long-term investors.

Many LSE-listed ETFs will passively track an index fund (see below), but there are also actively managed ETFs which invest in LSE-listed companies without exactly tracking an index.

Most LSE ETFs which don’t track the main indexes are instead focused on investment in fixed income products (e.g. government bonds), but some which invest in shares include:

• iShares UK Dividend UCITS ETF (LON: IUKD)
• Lyxor Core UK Equity All Cap (DR) UCITS ETF – Dist (LON: LCUK)
• Amundi Prime UK Mid & Small Cap UCITS ETF (LON: PRUK)

Index funds

An index fund is a type of ETF that aims to mirror a market index's performance by investing in all the shares in the index in the same proportion as the index, usually weighted by market capitalization. The main LSE market indexes are the FTSE 100 and the FTSE 250, but there are quite a few others (e.g. FTSE 350, FTSE All-Share).

Because they automatically track an index, index fund ETFs are passive funds, unlike actively managed ETFs, which may not follow any index exactly. Passive funds will usually have lower management fees than actively managed ETFs.

Examples of LSE index funds:

• Vanguard FTSE 100 UCITS ETF (LON: VUKE)
• Lyxor FTSE 100 UCITS ETF (LON: L100)
• iShares Core FTSE 100 UCITS ETF (LON: CUKX and ISF)
• Invesco FTSE 100 UCITS ETF (LON: S100)
• Vanguard FTSE 250 UCITS ETF (LON: VMID)
• Lyxor FTSE 250 UCITS ETF (LON: L250)
• iShares FTSE 250 UCITS ETF (LON: MIDD)
• Invesco FTSE 250 UCITS ETF (LON: S250)

Individual company shares

Another way to invest in the LSE is to select several of the companies listed on the exchange and invest in them directly.

It would be too time-consuming and expensive to attempt to invest in all of them, but the list includes many blue chip companies which are UK household names such as Barclays (LON: BARC), HSBC (LON: HSBA), BT (LON: BT.A), Unilever (LON: ULVR), AstraZeneca (LON: AZN), TESCO (LON: TSCO), Aston Martin Lagonda (LON: AML), Dr. Martens (LON: DOCS), and Marks & Spencer Group (LON: MKS).

However, the fact that LSE-listed companies are large and well-known does not protect you from the increased risk of investing in individual shares because the success of your investments depends on the fortunes of just a few companies rather than a diversified fund.

Step 1: Choose a broker

There are hundreds of online share trading platforms to choose from. When comparing options, check their brokerage, cash withdrawal, activity fee amounts, and the tradable securities offered (which should include ETFs and shares).

Whichever broker you choose must have access to the LSE. For the sake of having all your investment activity in one place, you may also want access to US and European share markets from the same broker.

Some brokers offer commission-free trades on ETFs. If you’ve decided to invest in shares, look for a broker offering fractional shares since many LSE-listed companies have high prices for a single share.

Step 2: Decide how much to invest

Only ever invest what you can afford to lose because share markets are volatile.

If you can’t withstand losses in the short term, it’s best to wait until you can or plan to invest for the long term only. Losses are always a possibility, and your capital will be at risk.

Step 3: Transfer funds to your account

Add funds to your trading account with a bank transfer, the most commonly accepted method.

It may take some time for funds to clear before you can start trading. Note that your broker may require a minimum deposit amount.

Step 4: Choose between shares, ETFs, and index funds (or a combination of them)

ETFs and index funds are diversified across a range of companies, so they typically experience lower price volatility than individual company shares and can be better for long-term investment.

• Short-term investors hoping for quick capital gains (but also prepared for losses) may prefer to buy shares.
• ETFs can often be traded commission-free.
• Index funds mirror the market, so their value rises and falls in line with the broader market.

Step 5: Configure your order

Depending on the broker you use, you can choose from many different kinds of order.

A market price order is the most straightforward, requiring virtually no setup. Once executed, you’ll get shares at the next available market price for the share or fund unit.

If you have a specific strategy, you’ll need more options in terms of order configuration. Some brokers have highly customizable orders that can be triggered by events, meaning you can buy or sell when your chosen share or fund hits a price target.

Step 6: Place your order

When you’re happy with all of your decisions, submit your order to be executed.

Step 7: Monitor your investment

Share investment should not be a set-and-forget activity. Even if you intend to invest for the long term, you need to keep an eye on the company or fund's performance and price movements.