How to Invest in US Shares as a Foreigner
- What You Need to Know - The Basics of Investing in US Shares
- Risks of Investing in US Shares
Therefore, a non-US citizen can legally invest in US shares. However, there are several factors that foreigners should consider before investing in the US stock market.
What You Need to Know - The Basics of Investing in US Shares
Regulations and Restrictions
After the 9/11 terrorist attack, the US passed the Patriot Act that prevents individuals or businesses associated with terrorism, from financing their operations through American markets. American brokerage firms therefore, have strict KYC policies and are mandated to report suspicious activity to the government. Thus, it’s wise to work with a reputable international broker to ensure that you comply with US stocks regulations.
Tax Implications of US Investments
As a non-resident foreign citizen of the US, you are not subject to capital gains taxation. Therefore, your brokerage firm will not withhold tax from earnings on any investments that you have. However, you may have to report the income at home and pay capital gains in your home country. When it comes to dividends, you are taxed 30% on income earned as a non-resident foreign national. Some situations may subject you to a lower rate but that depends entirely on what treaties your home country has with the US.
Reasons Why You Should Invest in US Shares
- Largest and Most Liquid Stock Market in the World: The US stock market is the largest in the world. Its market cap is nearly five times that of China (second largest). Additionally, the US share market is the most liquid.
- It’s Global: A large percent of revenues generated by companies in the S&P 500 are from outside the US. For instance, in 2016, 43% of revenue posted by S&P 500 listed companies originated from outside the US. Therefore, if you invest in US shares, your exposure to the American economy is a lot more than you think.
- It’s not that Expensive: Some sectors of the US stock market aren’t that expensive. Therefore, anyone can easily access the market and buy shares in the USA.
Ways of Investing in US Shares
Today, investment opportunities are not bound by borders. If you are especially intrigued by the booming growth of shares in the US market, you may very well invest in them. You just need to know how to get started. There are six ways to invest in US shares. They include:
- American Depositary Receipts (ADRs): ADRs are a convenient way to purchase stocks in the American market. Foreign organizations leverage ADRs as a way to establish a presence in the US and raise capital. Companies are listed, settled, and traded just like US stocks, which makes it a convenient method for a foreign investor to hold foreign stocks.
- Global Depository Receipts (GDRs): With GDRs, a bank issues foreign shares of foreign companies in the international markets. This makes the shares accessible to investors outside the US. However, most GDRs are offered to institutional investors via private offerings.
- Foreign Direct Investing: Only serious investors should pursue direct investing. This is because the process is extremely complicated in matters costs, tax, currency conversions, etc. Additionally, there’s the risk of fraudulent brokers not registered in the US markets. With that said, there are two options to investing in directly: opening a global account with a broker in your home country or, opening an account with an American broker.
- Global Mutual Funds: These kinds of investments offer the benefits of mutual funds except the fact that you are investing in foreign stocks rather than domestic stocks. The downside is that these kind of funds have higher costs compared to their domestic counterparts.
- Exchange-Traded Funds (ETFs): These are excellent ways for investors to access the US stock market. There are ETFs that offer more focused bets. Such kind of a focus would be on a particular country. Thus, as an international investor, you can easily choose to invest in a US ETF without any hassles. You only need to worry about the fees, liquidity, etc. before buying an American ETF.
- Multi-national Corporations (MNCs): In case you are wary of all the above ways, you ca choose to invest indirectly in US shares. Some of the best US MNCs that you can purchase stock from include McDonald’s or Coca Cola.
Risks of Investing in US Shares
Some of the risks associated with investing in US stocks include:
- Exchange-rate Risk: Returns on stock investments from the US are tied to changes in the currency values between the US dollar and your home country’s currency.
- Country Risk: If the US suffers from political, social, or economic instability, then your US shares are bound to take a beating.
- Stock Analysis is Trickier: Different governments have different reporting techniques and tax regulations on shares. Therefore, this makes stock analysis a bit challenging that it would be in your home country.
Investing in US shares is an effective way of diversifying your portfolio. However, it can simultaneously expose you to the risks associated with exchange rates, economic or political instability, etc. Nevertheless, as a non-US citizen, you can now access the US stock market. As always, make sure to stay true to your investment objective, costs, risk tolerance, etc. for good returns.