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How non-US citizens can invest in the US stock market?

Mobile Stock Investing

You’ve read loads of books, listened to some podcasts and maybe even completed a course or two, all to learn how to get on the path to financial independence. There’s one piece of advice that everyone you’ve followed agrees on: stocks are a critical part of your personal investment portfolio.

So, you’re excited and ready to go out and buy some shares in Google, IBM and Coca-Cola. Every expert tells you these are great companies to own that will make you great returns too. But your enthusiasm starts to turn into frustration as you find out that you can’t even apply for a stock brokerage account without a US social security number.

Don’t give up yet because you are almost there. In the next few sections I will share how you can easily invest in great companies listed on US stock markets and what you need to be aware of when you do so.

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Is this article for you?

This article is most useful for you if you are:

  1. Not a citizen (or green card holder) of the United States of America; and
  2. Not a resident of the United States of America, meaning that you stay in the country less than 31 days a year or 183 days over a 3-year period; and
  3. Not an “active” stock trader, meaning that you only occasionally buy and sell shares (less than a few transactions every month)​

If you meet all the above criteria, then you are considered a Non-Resident Alien (NRA). If you are not an NRA, then you will find the rest of this article a useful reference but you may want to do more research since you will generally have more options when investing.

Unfortunately, as an NRA your options for buying shares in US listed companies are much more limited.​

What are your options for investing in the US stock market?

To invest in stocks, you need to open a brokerage account. There are many online brokers that you may have come across, like E*Trade, Merill Edge and Fidelity among many others. While these may be good services, they do not all accept applications from NRAs.

Below are several online brokers that do allow Non-Resident Aliens to open an account. Brokers offer different types of accounts with a range of features and tools that are targeted to different types of investors. Each broker has its own fee structure which can make comparison difficult. The table below compares brokers against basic factors most relevant to a novice investor:

  • Minimum Balance: The minimum amount of money you need to deposit in your account to start investing.
  • Commission: The amount of money you are charged per transaction (buying or selling shares).
  • Monthly Fee: The amount of money you are charged every month by your broker regardless of your trading activity.

Broker

Minimum Balance

Commission

Monthly Fee

Charles Schwab

$25,000

$8.95

Nil

DriveWealth

Nil

$0.0125 per share subject to minimum $2.99 per transaction

Nil

Interactive Brokers

$10,000

Minimum $1

Maximum 0.5% of transaction value​

$10 - $20

Just2Trade

$2,500

$2.50 - $5.50

Nil

TD Ameritrade

Nil

$9.99

Nil

Which stock broker is right for you?

The broker you choose depends on your maturity as an investor, the type of securities you want to invest in (stocks, bonds, mutual funds, ETFs), your risk appetite, personal investment strategy, etc. For most novice investors, I suggest using DriveWealth for 6 reasons:

  1. Setting up an account if you are an international investor is easy. All you need to do is register to create an account and submit some documentation to verify your identity and address online. I found their support staff to be helpful and responsive should you need assistance along the way.
  2. Their fees are competitive as the above table shows. Keeping the cost of investing low is one the most important things you should do because fees quickly eat into your returns.
  3. While they offer a wide selection of individual stocks and electronic traded funds (ETFs), DriveWealth does mitigate some risk for you by applying the following criteria to securities offered:
    • US exchange listed
    • Market capitalization greater than $1 billion or 3 month average daily dollar volume must be greater than $0.5 million
    • Exchange listed sponsored ADRs (American Depository Receipts)
    • Non-leveraged ETFs
    • Share price greater than $1 
  4. The DriveWealth user interface of their Android and iPhone apps is simple to use for novice investors. You simply add all the stocks you want to buy to your shopping cart, review the charges during check out and pay.
  5. It is easy to fund your account. Options include by international wire transfer, by credit card or by Western Union.
  6. Most of all, DriveWealth allows you to buy fractions of shares. This is a big deal for small scale investors. Say you have $1,000 and want to split it equally among a portfolio of 10 stocks ($100 for each stock) which includes shares of Amazon. You would find that a single share of Amazon costs around $800. Normally, you would not be able to include Amazon in your portfolio because you would have to buy at least one whole share. But DriveWealth allows you to buy a fraction of a share in Amazon meaning that your portfolio can include any company you like regardless of the company share price.

Will my investments be taxed?

As a Non-Resident Alien, your application for a brokerage account will involve filling a W-8BEN form. This form establishes your US tax liability as a NRA. A good online broker like DriveWealth will offer you assistance to fill out the form correctly.

There are 2 main US government taxes that any investor in US equities needs to be aware of:​

  1. Capital Gains Tax
  2. Dividend Tax

A capital gains tax is a tax applied to the profits you make from the sale of shares. Your profit is calculated as the difference between the selling of the shares and the price you bought the shares for. Luckily, capital gains tax is not applicable to NRAs in the US.

A dividend tax as the name suggests is a tax applied on the dividends earned from your stock holdings. This tax is applicable to NRAs. It is applied as a withholding tax, meaning that your stock broker will automatically deduct the applicable tax amount from your dividends before paying then out into your brokerage account.

In general, the dividend withholding tax rate is 30%. This rate will apply to you by default unless you can show that your country is granted an exemption or a lower rate under a tax treaty with the US government. Make sure you check the list of tax treaties on the Internal Revenue Service (IRS) website to find out if you can save some money. In case you find out that you are eligible for a lower tax rate make sure that you immediately inform your broker.​

What's next?

Once you’ve opened an account with your online broker you might be wondering what stocks to buy. In my next post, I’ll share with you one way to decide if the shares of a company might be a good investment.

  • January 16, 2017
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