Can Non-U.S. Citizens Buy Stocks of U.S. Companies?

Many traders like the idea of investing in U.S. stock markets. Well, who wouldn't because it is one the most prosperous markets in the world.

Even in the uncertain year of 2020, the U.S. stock market soared to new highs. And that's what makes the stock market interesting and tradeable.

However, there is a slight problem. Many think only a U.S. citizen can buy U.S. stocks.

Is it true or just a myth? In this guide, we will find out if you can buy U.S. stocks as a non-U.S. citizen.

How does the U.S. stock market work?

Before digging deeper, let's find out how the stock market works in the U.S.

The stock market comprises several stock exchanges where traders and investors can purchase and sell shares of publicly traded firms.

A share of any company is a fraction of a public company's ownership. As a result, the stock price generally reflects stock investors' and market analysts' predictions for the company's potential income.

Stock market prices are decided in various ways, but the most typical is through an auction process where buyers and sellers put bids and offer to buy or sell.

Stocks can be bought or sold at the bid or ask prices, depending on who wants to buy or sell them. Trade takes place when the bid prices and ask prices become equal.

Investors who think a company will perform well bid higher, while those who feel it won't perform well bid lower.

Sellers hope to make much more money than they paid for each share they sell. Buyers aim to get the greatest deal possible to resale it for a profit later.

Stock market index

The NASDAQ (QQQQ) and the NYSE (New York Stock Exchange) are the world's largest stock exchanges. Their market capitalization, which reflects the value of all the shares listed on the exchanges, is in trillions of dollars.

The Dow Jones Industrial Average (the top 30 U.S. corporations), the S&P 500 (stocks of 500 large-cap U.S. corporations), and the Nasdaq track the stock market's overall performance over time.

Many market components and sectors have indices that track them. The Russell 2000, for example, covers 2,000 small-cap enterprises.

U.S. stock markets are regulated by the Securities and Exchange Commission (SEC). The SEC's objective is to protect investors, ensure fair, transparent, and efficient markets, and enhance shareholder value.

How to buy U.S. stocks?

Supply and demand dictate stock prices on exchanges. As a result, there is a maximum price that someone is ready to pay for a stock at any one time.

On the flip side, a minimum price for which someone is ready to sell shares of the stock.

Consider stock market trading similar to an auction, with some investors bidding for equities that others are willing to sell.

When a stock is hot, investors will buy it faster than sellers want to sell it, increasing the price.

However, if more individuals sell a stock than buy it, the market price would decline.

You buy and sell stocks through an online broker, a company permitted to deal stocks on a stock exchange.

A broker can be a real person you instruct what to buy and sell, or an internet broker, which is more prevalent.

We will talk about stockbrokers later in this guide.

There are two ways to gain money: trading and holding. First, you will buy and sell stocks regularly, taking advantage of price fluctuations.

Investors who choose to buy and hold prefer to wait for their stocks to rise in value. Often, the companies whose shares they buy give them dividends regularly.

Why should you buy U.S. stocks?

The stock market in the United States is highly sophisticated, and as a result, company information is readily available. This way, the American stock market attracts more global investors than any other country's stock market.

Stocks from the United States can help you diversify your portfolios, buffer against risk, and obtain exposure to growth in countries other than your own.

You reduce the risk of losing money overall if one investment goes bad by spreading your money over tens or hundreds of companies.

The S&P 500 is the world's largest stock exchange by market capitalization, projected to be $30.5 trillion.

Why is this the case?

Because it is home to 500 of the world's most successful firms, including Apple Inc. (AAPL), Microsoft Corp. (MSFT), and Amazon.com Inc. (AMZN) 4. Alphabet Inc., Facebook Inc. (F.B.), and others

Portfolio diversification

Purchasing stocks allows you to own a portion of a firm, which has advantages such as dividends and capital gains as the stock price rises over time.

According to many investors, equities should make up a large portion of your investment portfolio if they have excellent long-term growth prospects.

Political advantages

While economic risk is frequently defined as a country's ability to repay its obligations, political risk is its willingness to repay loans or maintain an investment-friendly environment.

Even if a country's economy is strong, the country may not be a good investment option if the political atmosphere is hostile to outside investors (or grows hostile).

The U.S. is a politically stable country; it attracts many stock investors from around the world.

Understand the risks

Here are some of the risks you need to know before investing in the U.S. stock market:

The overall U.S. economy

It is no secret that the U.S. economy is heavily reliant on debt. This is because the policies are set up so that both large and small businesses can easily obtain a loan or a fresh round of investment. In such circumstances, rising interest rates are debilitating to the business. Moreover, it may affect your investment immediately.

High volume

High trade volumes are unavoidable in a market as vast as the U.S. stock market. The fact is, however, that not everyone trades in great volume.

Assuming a buyer for the volume of shares you are willing to sell is one of the worst blunders you can make as an investor.

Value risks

When the market turns against or ignores your investment, this is referred to as market value risk. It occurs when the market chases the next hot thing leaving many good but uninteresting enterprises behind.

It also happens when the stock market crashes because both good and bad stocks suffer as investors flee the market.

Bubbles and crashes

When investors place excessive demand on a stock, the price rises well beyond any realistic or sensible reflection of its true value.

Instead, you should use the performance of the underlying company to assess its worth. For example, major market indices such as the S&P 500, Dow Jones, and NASDAQ can be observed rising to new highs during a bubble.

A crash, on the other hand, is a large decline in a market's total value. The bubble bursting, which forces most investors to abandon the market simultaneously, nearly always triggers a crash. As a result, the market suffers significant losses.

There is a concept of stock market correction also. It surfaces when the price of a stock falls by less than 10%.

A stock market crash happens when prices drop by that much or more in a single day. A crash has the potential to start a recession. Stock market crashes are a common occurrence, according to history.

What do you need to know as a non-U.S. citizen?

To invest in American companies, one does not need to be a U.S. citizen. Moreover, while investment securities in the United States are regulated by U.S. law, no particular prohibitions prohibit non-US nationals from engaging in the stock market.

Non-US investors may have to jump through some more hurdles before investing in U.S. stocks. Foreign owners and holders of assets in the United States are subject to a slew of U.S. laws designed to safeguard the country's interests.

Non-U.S. investors can use an international stockbroker to ensure they're following all of the rules that apply to U.S. equities.

Getting a brokerage account

The simplest way to trade U.S. equities is to open a brokerage account with a U.S. broker. Non-citizens, on the other hand, face varied procedures depending on their resident status, and non-citizens must produce more evidence to comply with their internal laws.

Non-citizens are subject to varying restrictions depending on the brokerage firm. For example, brokers may accept applications in some situations, but they require paper forms rather than online forms.

Other brokers are less welcoming to non-citizens, particularly nonresident immigrants, and require valid visa information before creating a stock trading account.

If you can't find a broker you prefer in the United States, you can open a brokerage account with a foreign financial institution that will provide you access to U.S. stock exchanges.

Best brokers for Non-U.S. citizens

Here are some of the best brokers for buying American stocks:

1.  Interactive broker

   
   

Interactive Brokers is, without a doubt, the greatest online broker for non-US residents looking to trade in the U.S. market. To begin, the broker provides a wide range of security classes, such as stocks, options, futures, bonds, currency pairs, and so on.

The large range of options and affordable fees has drawn in millions of retail traders from all around the world.

2. T.D. Ameritrade

There are many good brokers in America, including T.D. Ameritrade. It offers various platforms for traders of all types. In addition, the various educational offers assist new investors in encouraging them to branch out into different asset types as they grow their trading skills.

The Thinkorswim platform provides active investors and traders with all the data, charting, and tools they need to uncover market opportunities.

3. TradeStation

TradeStation is a good alternative for active or intermediate traders who wish to enhance their abilities because of their commitment to superior customer service and focus on high-quality market data and trade executions.

In addition, its systems are reliable and remain operational even when trading volume spikes.

Overall, TradeStation has made a concerted attempt to appeal to a broader range of investors, but the platform works best for active, technically-minded traders.

TradeStation has minimal commissions, particularly for equities and ETFs. In addition, there is no inactivity fee, and the first withdrawal each month is free.

4. Oanda

OANDA provides clients with access to a wide range of financial products, but it is best suited for experienced traders looking for top-notch desktop trading experience. In addition, the products available differ by area.

Fast and dependable trade execution, above-industry research resources, usable user interfaces, and a track record of regulatory oversight distinguish the broker.

5. AvaTrade

AvaTrade is headquartered in Dublin, Ireland, has satellite offices around Europe and the Asia-Pacific region, and is registered in several jurisdictions across the world.

AvaTrade offers a comprehensive range of tradable products, including forex, equities, commodities, cryptocurrencies, and indices, on a variety of trading platforms for both manual and automated trading.

Which docs are required to open an account?

Each brokerage firm will have its own set of guidelines. If you're new to the stock market in the United States, an international stockbroker can assist you in investing. In addition, brokerage firms can assist you in ensuring that your investments are compliant with all applicable laws.

Likewise, a broker on the American stock market is familiar with its peculiarities. For example, some brokerage businesses focus solely on working with international clients.

Non-U.S. investors, on the other hand, should examine whether the brokerage firm allows investors from their specific nation; some firms have geographical restrictions on who they engage with.

The good news is that many brokerage firms have online platforms where investors may track their investments at any time and from anywhere.

All of your docs, such as your visa or passport information, as well as proof of identity, will most likely be required.

You can start a new account with an online broker by filling out an application online, which is usually a quick and straightforward process. A driver's license number or passport number must be provided as identification.

Suppose you're interested in trading options or requesting margin privileges. In that case, you'll have to sign extra documents, and the broker will need to know about your net worth, job status, investable assets, and investing ambitions.

To comply with their particular standards, certain brokerage firms may ask non-US nationals to produce additional types of identity documents.

These documents include visa information and W-8BENs (Certificate of Status of Beneficial Owner for United States Federal Tax Withholding).

Non-U.S. citizens may also be required to submit paper applications rather than online to open accounts with some brokerages.

Depending on how you choose to open your account, you may need to bring additional materials. Ask your broker what you need to bring before diving into the investment pool. If you have completed all the required paperwork, you can usually open an account on the same day.

Although opening a brokerage account isn't much more difficult than opening a bank account, it does require some homework. You'll be doing your future portfolio a major favor if you take the time to ensure a broker is suited for you.

Dealing with taxes

Nonresidents of the United States who trade in U.S. stocks may face tax concerns. Nonresident aliens are subject to a 30% tax on investment income, which is normally withheld at the source by the brokerage business.

Citizens of nations with tax treaties with the United States often pay lower tax rates. Nonresidents, on the other hand, are frequently immune from U.S. taxation on capital gains.

The IRS levies a tax on resident aliens' worldwide income from all sources. As a result, the tax considerations are normally identical to those imposed on citizens of the United States. As a result, you'll typically file tax returns that are similar to those filed by Americans.

Key takeaways

● American companies can be invested in without being a citizen of the United States.

● Because foreign investors and holders of U.S.-based stocks are subject to various U.S. laws designed to safeguard U.S. interests, non-U.S. investors may have to jump through some extra hoops before investing in U.S. equities.

● To comply with their particular standards, certain brokerage firms may ask non-US nationals to produce additional types of identity documents.

● Some U.S. corporations list their stocks on international exchanges for investors who want to invest in the U.S. market but cannot do so due to entrance hurdles.

Final thoughts

So, there you have it! Yes, you can invest in U.S. stocks as a foreign national. However, remember to comply with a few guidelines before jumping into the American stock market pool.