Can Foreigners Buy or Invest in US Stock Market?
|Can Foreigners Buy Or Invest In US Stock Market?|
There are no restrictions on foreign investment in the US and non-US resident individuals investing in the US are generally only subject to US tax on limited US source income and gains. There are a few things to watch out for, in particular taxes, currency movements, and additional dealing costs.
If you are considering investing in the US, below is all we think you should know!
Can You Trade in the U.S. Stock Market if You’re a Non-Citizen?
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 encourage foreign investments in the equities and debt markets that fund US capital markets and the US economy. Why is this? It’s 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.
Identity Requirements for Non-U.S. Citizens
One of the goals of the Patriot Act of 2001, passed following the 9/11 terrorist attacks, was to prevent individuals with any links to terrorist activities from funding their illegal activities through the American capital markets.
The act led to brokerage firms implementing more stringent requirements for verifying customer identities, particularly for non-U.S. citizens. Part of this legislation also requires stockbrokers to report any suspicious account activity to the U.S. government. However, these regulations obviously do not impact the majority of international investors because the vast majority of investors do not have any criminal associations.
Some brokerage firms may require non-U.S. citizens to produce additional types of identification documents in order to comply with their individual policies. This can include visa information, a valid Social Security number, or a Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting form (also called a W-8BEN). Some brokerages may also require non-U.S. citizens to submit paper applications versus submitting online applications to open accounts.
What time does the US stock market open?
The NYSE and NASDAQ are open Monday-Friday 9:30 a.m. to 4:00 p.m. Eastern Time. There are 9 trading holidays when markets are closed plus several scheduled half-days. On half-days markets closed at 1:00 p.m.
Pre-market trading is 6:30 a.m. to 9:30 a.m. and after-hours trading is 4:00 p.m. to 8:00 p.m. Most online brokers allow retail investors to place trades during extended hours.
Opening a Foreign Brokerage Account
To trade US stocks, the easiest thing to do is to open a brokerage account with a US broker.
However, brokerage firms have different procedures for non-citizens based on their residency status, and non-citizens will have to produce more documents to comply with their internal rules.
On top of that, not all brokerages participate with international investors.
International investors in the US stock market typically choose to go through a brokerage firm to manage their investments. Using a reputable broker ensures that investments will comply with applicable laws, and a US-based broker who is familiar with international investments can help people navigate the somewhat complicated topic.
If you are a non-resident of the US looking to invest and you are choosing a brokerage firm, make sure that they work with international investors. Do the homework. Take the time to check that they work with your specific country of residence because some brokerage firms only serve certain areas.
Also, some brokers require additional documentation from international investors, including proof of identity, visa information, and tax documents.
There is no citizenship requirement for owning stocks of American companies.
There are some extra hoops that non-U.S. investors may have to jump through before investing in U.S. stocks because foreign owners and holders of U.S.-based assets are subject to an array of U.S. laws intended to protect U.S. interests.
Some brokerage firms may require non-U.S. citizens to produce additional types of identification documents in order to comply with their individual policies.
For investors that really want to invest in the U.S. market but are encountering barriers to entry, there are also some U.S. companies that list their stocks on foreign exchanges.
U.S. Dividend Income
As a non-U.S. taxpayer, you’re subject to Chapter 3 withholding. When investing in a U.S. security, any dividend income is subject to withholding by your broker at the time of payment. You may not have a year-end tax bill, because the withholding is remitted to the IRS on your behalf when the income is deposited into your account. The statutory tax rate is 30%. Certain countries have entered into a treaty with the United States that may qualify you for a reduced rate if you’re eligible and have claimed the exemption on an IRS Form W-8BEN. To learn more about tax treaties, explore the tax treaty tables section on the IRS website.
Non-U.S. Dividend Income
Dividend income received from non-U.S. securities may already have the country of incorporation’s tax deducted before the income is received. The net amount is distributed to your account; additional U.S. withholding is not applicable.
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W-8BEN Tax Form For Foreign Investors
The W-8BEN is a common tax form required for foreign investors. Many international investors choose to work with a web-based brokerage account. This allows them to access their accounts from anywhere at any time, without worrying about finding a branch location.
Many web-based brokerage firms specifically cater to international investors.
Form W-8BEN expires after three years from the day you signed it. Your broker should always notify you to renew it before it expires. If yours has expired, your account will be subject to the normal taxation for a foreigner, even if you’re from a tax-exempt country.
If you can't find a broker you like in the US, then some foreign financial institutions will allow you to open brokerage accounts that will give you access to US stock exchanges.
Some foreign financial institutions and big brokerage firms have access to the US stock market either by partnering with US financial firms like Merrill Lynch or through global depository receipts. So, be sure to check with the financial institutions in your home country to determine the ones that offer these services.
Patriot Act (2001) - New Restrictions and Regulations
One of the goals of the Patriot Act passed after the 9/11 terrorist attacks, is to prohibit organizations and individuals linked to terrorism from financing their illegal operations through American markets.
The US government has gone to great lengths to ensure that certain organizations that have been linked to terrorist activities, along with their members or suspected members, are not able to finance their operations through American capital markets in any way.
This means that brokerage firms are required to verify customer identities and report any suspicious account activity to the government. These regulations don’t have an effect on the vast majority of individual international investors.
It's safe to say that if you are not involved in any illegal activities or any activities that the US government and its organizations may find offensive, you should be well within your rights to own stock in US-based companies.
However, you should always make sure to work with a reputable international broker. This will ensure that you are complying with the wide array of new and updated regulations that govern US stocks.
Also, make sure to plan for some additional obstacles you might need to overcome first before you can begin investing.
Tax Implications For Foreign Investors
Non-US citizens trading US stocks potentially have to deal with elaborate taxation issues. In general, nonresident aliens pay a 30% tax on investment income. The tax will typically be withheld at the source by the brokerage firm involved.
If you qualify as a non-resident foreign national of the US, you are not subject to capital gains tax.
This means that your brokerage firm will not withhold that tax from earnings on international investments. However, most countries require that residents pay capital gains tax on money earned in foreign markets. You may have to report the income and capital gains at home.
Earned dividends are taxed as income for non-resident foreign nationals. Non-resident foreign nationals are subject to a flat 30 percent tax rate on their income. Earned dividends, which come directly from the US companies you invest in, are considered income.
There are some situations in which you may be subject to a lower rate. This is depending on any treaties, your home country has with the US, and if the dividends are interest-related.
Navigating international taxation is a reason it may be better to work with an international broker. A reputable broker will make sure you know all the US tax implications of your investments.
Not being a US citizen shouldn't stop you from investing in US stocks. Just be aware that there are some extra hurdles you might need to overcome to do it!
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Deciding On A Brokerage as a Foreign Investor
For example, if you are a UK citizen, you can open a brokerage account with Saxo Bank or Barclays to trade in the US stock market. As another example, if you’re in Malaysia, you can use CIMB Bank to invest in the US stock market.
There may be brokerage firms or other financial institutions that offer similar services in every country, so do your research.
Although some US-based brokers don’t allow foreign clients to open a trading account with them, a few do offer online services to clients in specific countries.
Some of the US brokers that serve international clients online include Firstrade, MBTrading, Zecco, TradeStation, TD Ameritrade, Sogotrade, and Just2Trade. Each of these has a list of countries they accept clients from. Before you choose any of them on the list, find out if it supports your own country of residence.
There are some brokers with an international presence. This means that they have offices in different parts of the world, even though they are headquartered in the US. The two brokers in this group are Charles Schwab and InteractiveBrokers. They have offices in the UK, some European countries, Hong Kong, Singapore, and Japan.
The Risks of Foreign Investing
International investing, however, has its flip side. In terms of volatility, emerging markets, in general, are considered riskier. They can experience dramatic changes in market value, and in some cases, political risk can suddenly upend a nation's economy. Furthermore, it should be noted that foreign markets can be less regulated than those in the U.S., increasing the risk of manipulation or fraud.1
Today's investors have extraordinary access to 24-hour global news, yet there is also a risk of inadequate information from a market that is often thousands of miles away. This can limit the investor's ability to interpret or understand events.
Finally, there is currency risk stemming from changes in the exchange rate against the investor's home currency. Of course, currencies move both ways and can also be in the investor's favor.
If you're up for the opportunity and risk of international investing, there are six ways to gain exposure to growth outside the U.S.
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