Why Should You Buy International Stocks
You probably already know how important diversification is in your investment portfolio. By spreading your money out among tens or hundreds of companies, you decrease the risk you lose money overall if one investment goes south.
Given the vast amount of choice in the U.S. stock market, you might think you have all the investment options you need to properly diversify without ever looking at companies beyond American borders. But companies beyond those traded on the U.S. stock exchanges can be powerful assets with multiple benefits.
Superior Returns Compared To India
The US stock market consistently outperforms the Indian market over the last 10 years. In Figure 1, we compare returns of the DOW Jones Index in the US to the BSE Sensex. During this time period, the DOW returned 196%, while the SENSEX returned 150% .
Figure 1: Returns comparison between the Dow Jones index vs. the Sensex.
In addition to equity returns, the savvy investor should also think about the effect of currency fluctuations between INR and USD. In the past 10 years, the Rupee has depreciated 44% compared to the USD. This has a significant negative impact towards returns of Indian stocks widening the performance gap. about why investing in the U.S stock market has offered superior returns.
Figure 2: INR to USD exchange rate from the last decade INR has depreciated by more than 44% in the past decade.
You can read more about this topic here.
Indians Are Increasingly Buying Stocks Of Some Of The Biggest Global Companies But The Diversification Comes With Heightened Volatility And Currency Risks
- Print Edition: Jul 10, 2022
When the worlds richest person says something, everyone listens. So, when Elon Musk said that he had acquired a significant stake9.2 per cent, to be precisein Twitter and planned to acquire the microblogging company, everyone took it seriously. While some analysed his actions from the angle of free speech, there were manyincluding a large number of average Indian investorswho looked at it from an investment perspective.
For, they rightly thought that news about the worlds richest person buying one of the most influential microblogging platforms will send the companys stock zooming. It did indeed. Shares of US-listed Twitter jumped a little over 28 per cent in a single day on April 4a day after Musk made his stake publiceven as a number of Indian investors placed their bets on Twitter.
In India, some international and home-grown platforms such as Vested Finance, Stockal, Winvesta and INDmoney, among others, offer an international trading facility wherein Indian investors can directly buy shares of companies listed on foreign bourses. Many large broking firms in India have also tied up with these platforms to help their clients buy shares of overseas companies. The trend caught everyones fancy during the lockdowns when people were locked inside their homes and had the time to explore various investment options as part of their overall diversification strategy.
A growing tribe
A costly affair?
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Funding And Withdrawing From Your Us Broker
The majority of brokers will only accept bank deposits. Those can be wire transfers, or ACH (for those with bank accounts in the USA.
While wire transfers work usually smoothly, usually the fees tend to be higher, both from the bank as well as from the broker.
Depending on your broker and your location, some other options are available. On some brokers you can do SEPA deposits if you have an account in the SEPA area.
Mistake #5 Disregard Us Foreign Trust Reporting Rules
Foreign trusts are particularly common tax time bombs that lurk undetected in the old country investment portfolios of many new arrivals to the United States. Many structures often meet the IRS definition of a foreign trust even though they are not commonly thought of as trusts. Unfortunately, many new Americans and new green card holders go years without properly reporting interests in foreign trusts, only to find out that cleaning up the problem is costly and time intensive. Where a U.S. taxable person has a beneficial interest in a foreign trust, the trust must provide a detailed accounting of its activities, or the beneficiary will be subject to punitive tax rates on distributions.
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Firstrade: Top International Brokerage Pick
Our top pick for an international brokerage is Firstrade. They offer commission-free trading, retirement accounts, and most importantly, international accounts for non-US investors. This brokerage participates with over a dozen foreign countries. If your country is listed below, you can invest in US markets with Firstrade!
You can read our full review of Firstrade here.
Trading Fees: $0Tradable Securities: Stocks, ETFs, bonds, optionsTop Features: low trading fees, no minimum deposit, margin accountsParticipating Countries:
Account Minimum: $0, TradeStation Select $2000Tradable Securities: stocks, bonds, mutual funds, ETFs, options, futures, cryptocurrencyTop Features: commission-free trades, platform trading tools, research data, education, crypto trading
How To Open A Trading Account In The Us
To open a U.S. trading account, you need to search for an online, US-based broker that accepts clients from your country of residence. When you have found the one youre comfortable with, read their FAQ page to know all the documents you need to provide and the process involved. Alternatively, you can give them a call.
You will often be required to provide your international passport and current utility bill as proof of your identity and nonresident status, so make sure you have them.
Go to the brokers website and click on the open account link to fill the necessary forms. Some of the forms may need to be signed, so you need to print them out. As a foreigner, you will be required to fill and sign the W-8BEN form. It is a very important form that indicates your foreign residence status, regarding taxations on income.
When youre done with filling and signing the forms, scan them and email or upload them to the broker, along with a scanned copy of your passport and recent utility bill. Then, wait for the broker to review your application and send you an email indicating whether your application is successful or not.
If your application is accepted, you can proceed to deposit into your trading account. You must have already found out the methods of funds transfer supported by your broker: Wire Transfer, PayPal, ACH Transfer, etc. Use the option that suits you.
Once the deposited fund reflects in your trading account, you can start trading.
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Estate Planning Considerations For Nras
In addition to the general tax on foreign investments in the US, it is imperative for NRAs to have an understanding of US estate and gift tax rules.
For estates, US Citizens and tax residents currently receive a tax exemption of $11.58 million in 2020 . Unfortunately, the estate tax exemption for NRAs is a mere $60,000. However, if you as a non-resident are married to a US citizen, you still get an unlimited marital deduction.
Assets known as US situs assets are subject to this $60,000 estate tax threshold. US situs assets include US real estate, US stocks , cash accounts with US brokerage firms, and certain debts to US debtors.
Once again, income tax treaties may have an effect on this. US tax residents must pay estate tax on worldwide assets, while NRAs must pay estate tax only on US property, with some treaty countries having higher exemptions.
Estate tax rates are the same for both US tax residents and for NRA. The highest tiered rate is currently 40%.
To avoid this estate tax, one can own these US situs assets in a foreign trust or company rather than in their personal name. By doing so, the shares of the company or trust rather than the actual asset automatically pass to the beneficiaries, meaning there is no estate tax.
Capital Gains & Dividend Tax
In the US, dividends are taxed at a rate of 25% for Indian citizens. Owing to the Double Tax Avoidance Agreement , the investor can claim credit for taxes paid abroad so that he/she doesnt have to pay tax on the same income twice.
There is no capital gains tax on your investments in the US. But you are liable to pay tax on the capital gains in India.
To know more about how capital gains are taxed in India, click here:Capital Gains Tax
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Can Foreigners Invest In Us Stocks You Need To Confirm Your Identity First
The 9/11 attacks on the U.S had a profound effect on various aspects of American society. Key among these was tightening the security of the nation. This gave rise to the Patriotic Act of 2001.
The act intended to limit terrorist funding by individuals via the American Capital Markets. Therefore, international stockbrokers had to implement stringent rules for verifying the identity of their clients. Especially for clients of foreign backgrounds.
Youll have to present identification documents such as visa information or social security numbers to ascertain your identity. This shouldnt be a problem unless you have ulterior motives. Most brokerage companies will also need a W-8BEN form from you for tax reasons.
Indian Fund Houses With Foreign Tie
Indian fund houses with foreign tie-ups may sound too complicated, but the process is easier. Indian stock marketers can access foreign stocks or invest in foreign currencies with the least effort. To get started with such opportunities, look for terms such as âEmerging Marketâ and âEurope Focusâ that allow you to invest in foreign companies through the local market. Here is the procedure is to buy mutual funds that are invested in foreign stocks, and these can be traced using the NAV of the mutual funds. An additional trick is to invest in funds of funds mutual funds. These funds are invested into foreign stocks and give a certain boundary for the marketers when the SENSEX or Nifty are failing. Several global companies have outperformed despite the pandemic or the current failing market situation. One classic example of this is Lamborghini which grew its sales despite the pandemic and lockdown. It would be great to invest in foreign stocks through the Indian Fund houses. Certain mature investors donât wish to invest in mutual funds, and this is when the direct investment method helps them out. In this method, you are investing in foreign stocks from India and not just buying mutual funds.
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Concentration Of Foreign Equity Holdings
The following table shows foreign equity holdings in the 500 largest U.S. firms. Generally speaking, the larger the U.S. business enterprise, the higher the percentage of foreign ownership.
Overall, foreigner investors owned 5.6% of the total U.S. equity market as of year-end 1994, but owned 8.5% of the 50 largest companies, and 7.5% of the 500 largest companies.
|All U.S. Companies||5.6%|
Company Size in the above table was calculated based on the total market value of voting equity securities as of year-end 1994. Mutual funds are excluded.
The preference of foreign investors for larger U.S. firms is not surprising. These firms are far better known to foreign investors, as many of them are multinational corporations doing business around the world. Further, there is much more information in the foreign financial press on larger firms than on smaller ones. In addition, larger corporations are much more likely to list their stocks on foreign securities exchanges as well as on U.S. exchanges.
Current And Capital Account Transaction
It is important to understand all transactions involved in LRS other than stock market investments. This is because they too affect the remittance ability of an individual. This $250,000 is permissible for current or capital account transaction or a combination of both. The current account transaction can include gifts, donations, emigration, medical treatment, business travel, private visits to any country . The Capital account transaction include the following:-
- Making investments abroad
- Purchasing property abroad.
- Extending loans including loans in INR to NRI/PIO close relatives.
- Setting up of wholly-owned subsidiaries and joint ventures outside India for bonafide business.
- Repayment of loan acquired when you were a non-resident etc.
The LRS restricts buying and selling of foreign exchange abroad, or purchase of lottery tickets or sweepstakes, proscribed magazines, etc. An individual is also restricted from investing in a country that has been identified by the Financial Action Task Force as non-co-operative countries and territories.
In the case of investment in shares, debt instruments, and mutual funds it is not necessary that the interest or dividend earned have to be remitted back. They can be reinvested or retained or used to meet any expenses abroad. The investment and their profits too can be reinvested without being brought back to India.
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Inflows Into Us Equities From Outside The Country Are At A Multi
- Foreign investors to buy more U.S. stocks than corporations in 2020
- Demand could be boosted by falling USD
- Household equity demand expected to reach $280 billion in 2020
- Aggregate equity allocation recovering after falling 40% in Q1
Foreign investors bought $187 billion in U.S. equities during the last quarter, making them the biggest buyers during the recent bear market, according to Goldman Sachs. They are expected to buy $300 billion worth this year and replace corporations as the largest source of equity demand. Over the last two decades, the biggest driver of foreign investor equity demand has been a weakening U.S. dollar, and FX strategists estimate the greenback may fall by more than 20% from its recent peak.
Goldman analysts predict net corporate equity demand will drop by 80% in 2020 to $100 billion as buybacks are suspended. Corporations bought equities worth $129 in Q1. Pension funds and mutual funds were the biggest net sellers in Q1, and they are expected to remain net sellers for the year.
Retail favorites with the highest returns since the March 23 trough are Penn National Gaming Inc. , Moderna Inc. , Tesla Inc. , Royal Caribbean Cruises Ltd. , Snap, Inc. , MGMResorts International , Spirit Airlines, Inc. , Norwegian Cruise Line Holdings Ltd. , GoPro Inc. , and Marathon Oil Corporation .
Can You Trade In The Us Stock Market If Youre A Non
With the sheer size and growth of the US stock market, many non-citizens wonder whether or not they can participate. US stocks and bonds are indeed regulated by US law. However, as it turns out, you do not have to be a citizen to trade in the US stock market.
There are no specific laws prohibiting non-US citizens from investing in the US stock market.
In fact, many investment firms cater to international clients.
The Securities and Exchange Commission and our government actually encourageforeign investments in the equities and debt markets that fund US capital markets and the US economy. Why is this? Its because non-US citizens and foreign investors bring in a lot of money to US markets!
It is also wise to diversify your portfolio with stocks from multiple different countries. This is known as global market exposure.
US investors love buying stock in foreign companies. A few examples of this are Alibaba, JD.com and Baidu.
However, there are some extra hoops that non-US citizens have to jump through to get US stocks in their portfolios. You can open an online trading account with some US brokers, even as a foreigner, but more documentation will be required.
Some of the extra paperwork will include proof of identity and visa information, and there will likely be other requirements as well.
Ok, so let’s dive in and take a look at some of the top brokerages that provide excellent options for non-US citizens.
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Opening A Brokerage Account
An international stockbroker can help investors new to the U.S. market manage their investments. Brokerage firms can help ensure that your investments comply with all laws. Plus, a broker in the U.S. will be familiar with how to navigate the intricacies of the American stock market. Some brokerage firms even specialize in working with international investors.
However, for non-U.S. investors, it is advisable that they research whether or not the brokerage firm accepts investors from their specific country some firms restrict what geographical regions they work with. The good thing is that many brokerage firms maintain online portals where investors can monitor their investments at any time of the day and from any location.
For investors that have a hard time finding a U.S. stockbroker, some international financial institutions will allow investors to open accounts that give them access to U.S. stock exchanges. For investors that really want to invest in the U.S. market but are encountering additional barriers to entry, there are also some U.S. companies that list their stocks on foreign exchanges.
Opening An Overseas Trading Account With A Domestic Broker
Many domestic brokers have tie-ups with stockbrokers in the US. They act as intermediaries and execute your trades. You can open an overseas trading account with any such broker. You might have to submit a set of documents to open this account.
However, it is important to remember that this facility has some restrictions. Based on the brokerage firm, you might have some restrictions on certain investment vehicles or the number of trades that you can make, etc.
The cost of investing can be high considering brokerage and currency conversion charges. Hence, ensure that you know all the costs before opening an account.
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Popular Us Investment Glossary
Ok now that you have read the overview on how to buy us stocks from India, here are several glossaries that you need to know.
Investment Indices: Instead of investing in individual stocks, when investing in the US, investors can easily invest in a broad diversified basket of stocks through indices . Several popular US indices are:
- S& P 500: tracks the performance of the 500 largest US companies by market capitalization. In the year 2019, the S& P 500 surged more than 28%, which is the highest increase since 2013.
- Dow Jones Industrial Average: tracks the performance of 30 large US companies trading on the New York Stock Exchange and the NASDAQ. In 2019, the Dow Jones gained 22% for the year.
- Nasdaq Composite Index: tracks over 2,500 securities listed on the NASDAQ. In 2019, the Nasdaq Composite Index broke through the 9,000 level for the first time ever.
- Fractional shares: the ability to buy less than one shares. This means, you can buy high priced stocks such as Apple, Tesla, Amazon for as little as $1.
Figure 5: Annual return of the three major indices in 2019
Sectors: The US is the worlds largest economy and is home to the worlds largest stock market. Its economy can be classified into 11 major investment sectors, which encompasses communication services, energy, real estate and utilities. In 2019, all 11 sectors posted positive returns.
Figure 6: 2019 S& P 500 sector performance