How to Open a U.S. Brokerage Account?

This article will explain how to open a US brokerage account, and for that matter, is it a good idea?

For people interested in gaining access to US markets please email me – advice@adamfayed.com

What is a Brokerage Account’?

A broker account is an account within a brokerage firm with a valid license or an investment company through which a person can be able to trade with stocks, mutual funds, bonds, options and different types of other asset categories.

The person is able to perform the trades with the money that they have in their brokerage account. A brokerage account is necessary for a person who is willing to make investments in the stock market.

Brokerage firms are available based on the requirements of the investor. They might be available at a high price along with full service from the stockbrokers or an online platform with a great discount. 

The assets and the profits or losses that are subjected to the respective investment belong only to the investor and the firm doesn’t involve in those. The firm does charge fees and commissions though.

Brokerage accounts allow access to a wide variety of assets to the investor such as Stocks, Bonds, Mutual Funds, etc. Some brokerage accounts also have access to complex investments such as Futures, Forex, Options, CFDs, etc.

Most of the brokerage firms allow the investor to create an account online with very simple and easy steps. The investor can able be to fund his account by depositing money from different methods such as bank transfer, e-wallets, credit card, debit card, etc.

Almost all online brokers don’t charge any type of fees while creating an account. Most of the transaction processes that occur within a brokerage account happen within a week.

The investor can be able to open a brokerage account within a firm without requiring a lot of cash. Many online brokers offer investors the availability of an account, which doesn’t require any sort of initial deposit to be made.

There is no limit for the amount that can be deposited into a brokerage account. However, there might be a transaction limit per day or a week. Any person can have multiple brokerage accounts.

Unlike the retirement accounts, the investors might not be able to enjoy tax-related privileges while making an investment through a brokerage account.

There are two types of primary options for investors who want to create a brokerage account which is Online Brokers and Robo-Advisors. 

‘Online Brokers’ – The account through which the investor can be able to buy or sell investments through the official website of the brokerage firm is known as an Online Broker account. 

Many online brokers offer discounts for a wide range of investments which include stocks, funds, bonds, etc.

‘Robo-Advisor’ – Robo-Advisors are the digital platforms that operate based on algorithms that are strategically advanced and efficient and require no interaction from the investors themselves. 

Robo-advisors create surveys through which they obtain the financial plannings and goals of the respective investors and execute an investment in the required assets on their behalf.

In general, the investor can choose between a cash account or a margin account. A cash account would require the whole amount that needs to be invested whereas a margin account can let the investor borrow some amount that will be required by the investor. A margin account is riskier than a cash account.

A brokerage account can be created within a short time span as less as 15 minutes and it mandatory that the individual who is creating the account should be having an age of at least 18 years. In some cases, the parents of the investor can help them set up a brokerage account for their children who are having an age lesser than 18 years.

Some online brokers provide good research, expert guidance, education related to investments, Financial advice from expert financial advisors, etc. while charging relatively higher charges when compared to others.

Full-service brokerage accounts like Wells Fargo Advisors, Morgan Stanley, Merrill Lynch, etc. guide their investors to develop advanced strategies and investment plans in order to achieve greater profits. Discount brokerage accounts like Charles Schwab, E*Trade, Fidelity, Vanguard, etc. lack this kind of feature and provide comparatively lesser fees to the investors.

There is an availability of multiple types of brokerage accounts for the investors to choose based on different features like Speed of execution, Tools of analysis, tradable assets, etc. Investors may choose from these based on their requirements.

U.S. Brokerage Account:

The brokerage account through which a person can able to make investments in the U.S. Stock Market is known as U.S. Brokerage Account. There are many advantages that an individual might be able to benefit from having an U.S. brokerage account.

‘Advantages of having a U.S. Brokerage Account’ – The U.S. stock market is the world’s largest stock market which is the most preferred option for many investors around the world. Citizenship requirements are not mandatory when the investor opts to make trades in smaller amounts in a U.S. company. 

U.S. brokerage accounts are suggested to be the most efficient brokerage accounts when compared to the brokerage accounts of other nations.

Investors get access to a wide variety of global assets with effective costs. U.S. brokerage accounts have steady government regulations and investment protection programs (such as Securities Investment Protection Corporation). This helps for the protection of investors and regulates the losses that may occur.

When compared to many European rivals, U.S. brokerage accounts offer lower fees, effective services, etc. Transactions can be made very easily even if the investor is away from the united states. U.S. brokerage accounts offer access to various types of assets such as Stocks, Bonds, Mutual Funds and Certificates of Deposits. With U.S brokerage account, the individual can be able to make trades in both American companies as well as global companies.

U.S. laws related to taxation require dividend income reports and tax information if a person is going to trade with worldwide investments. 

Investment companies from other countries don’t produce dividend income reports such as the IRS Form 1099 (which report the dividend income).

Although it is a time-taking process, the individual can benefit from the taxation of qualified dividends. For Example, normal income tax rates as per the IRS regulations in the year 2011 were 25%, at the same time the tax rates for qualified dividends were only 15%.

Another backdrop for the dividend income reports is that the features such as capital gains (both short-term as well as long-term), dividends, qualified dividends, tax for the interest, etc. may vary depending on the respective country.

So, some countries might not be able to effectively produce the information that is required (in order to meet with the regulations as per the IRS). 

It is mandatory for the individual to get all the necessary information and the punishment and penalties might be severe for those who might not be to produce the required information. Therefore, a person might be able to produce the required information with the help of a 1099 form from the U.S. brokerage account.

Securities Investor Protection Corporation (SIPC) confirms investor protection in case of failure of the broker/dealer by making sure that investor has $500,000 coverage per their respective account. In most cases, third-party insurances are considered in order to cover up for the whole value of the investor’s account.

By having most of the investments in the United States, the investor is able to file FBAR (Report for Foreign Bank and Financial Accounts). This is because of the need to report a few institutions and accounts. 

It is suggested to have an online broker who has a substantial amount of experience and a valid license in the investor’s country of residence as well as the United States, since the process of managing risks related to currencies, investments and taxes is considered to be a very complicated task.

The disadvantages of having a US brokerage account

The main disadvantages are:

  • You can get access to US investments like the S&P500 anywhere in the world. You don’t need to open up an account with a US brokerage.
  • You could potential get into tax issues. For example, your heirs might pay more taxes upon death, due to US estate taxes. This is a low-risk situation but a risk nevertheless.

Methods for creating a U.S. brokerage account:

There are two primary ways through which an individual might be able to create a U.S. brokerage account. They are 

  • ‘Financial Institutions with access to the U.S. stock markets’ 

Investors can be able to create a U.S. brokerage account with the help of foreign financial institutions, which grant access to the U.S. stock exchanges to the investors. These financial institutions also require proper proof of the residency and citizenship of the respective investor.

These financial institutions gain access to these stock markets by becoming a partner with U.S. financial firms such as Merrill Lynch or they gain access through global depository receipts.

For example, a U.K. investor might be able to gain access to the U.S. stock market by opening a brokerage account with financial institutions like Saxo Bank, Barclays, etc.

Similarly, each country has its own brokerage firms or financial institutions through which an individual investor can gain access to the U.S. stock market by creating a brokerage account.

  • ‘US-based broker’

Being an investor who is not from the United States, one of the easiest techniques in order to open a U.S brokerage account is by opening an account with a U.S. broker. 

Although most of the online brokers don’t grant trading accounts to non-resident investors, some of them provide online services (to some selected countries) through which the person is able to make an investment by having an account.

Some of the famous online brokers which create accounts for non-resident investors are:

‘TD Ameritrade’ – Non-resident investors from over 100 countries are able to create a U.S. brokerage account with the help of TD Ameritrade. Some countries which may not be able to access an account with the help of TD Ameritrade are European Union, Canada, and Australia. There are some other possibilities for investors from these countries with a few exceptions.

‘Interactive Brokers’ – Considered to be one of the best online brokers, Interactive Brokers also grant access to the U.S. stock exchanges to non-resident investors by creating a U.S. brokerage account.

People from over 180 countries (almost all over the world) can be able to create an online account in order to make trades in the U.S. stock.

‘Charles Schwab’ – People from 100 countries are able to trade in the U.S. stock market by creating an online account. Unlike the TD Ameritrade, Charles Schwab also provides account creation for the investors from European union as well.

Other online brokers such as Firstrade, MBTrading, Zecco, TradeStation, Sogotrade, and Just2Trade also provide online brokerage accounts to non-resident investors from specific locations mentioned by them.

Getting a U.S. Brokerage account as a Non-Resident:

A most common question that comes to a mind of an investor from a country other than the United States is “Can I open a U.S. Brokerage Account, while not being a resident of the United States?”.

The answer to this question is “Yes”, the investors can be able to open a U.S. brokerage account while not being a resident of the United States and can make trades in the U.S. Stock Market. 

An even better thing is that they can be able to do this from their home for free. However, non-residents are required to submit more documentation than that of the residents in order to open a brokerage account. Some firms even require paper documents instead of online documents.

Procedure for creating a U.S. trading account:

For creating an online U.S. brokerage account, the individual would be required to follow a certain procedure. First of all, it is highly important to find out whether the online brokers accept clients from the Investor’s country.

If the country is accepted by the broker that the individual has chosen, he/she is required to read briefly about the respective broker and understand the standard procedures.

It can also be beneficial to read the FAQ page of the broker. After that, the investor has to take note of the documents that have to be submitted and the process of creating the account. The individual can also know this type of information by contacting the customer support of the relevant broker.

The most common documents that may be required by most of the brokers are proofs of identification and residency. For proof of identification, a person can submit documents such as International Passport, International Driver’s License, National ID card, etc. For the proof of residence, an individual can submit documents such as Utility Bill, Voter Registration Card, etc. 

Most of brokers require a passport and a utility bill. So, it is better if these two are arranged and kept available. After that, open the website of the online broker and fill out the required form in order to create an account. Some forms require the signature of the individual, so the person has to take a printout and sign them manually.

As the investor is not from the United States, it is mandatory to sign a W-8BEN form (which declares information about the residence and tax details of the person).

After filling the forms along with the signatures and scanned copies of the documents necessary, the person can either scan them and email them or he/she can upload it directly to the website of the online broker. 

The online broker will have a team to review the application and send the application status (whether accepted or rejected) through an email.

After being successfully accepted by the broker, the person can be able to fund his/her account. The most common transaction methods accepted by many types of brokers are Wire Transfer, PayPal, ACH Transfer, Debit/Credit Card Transfer, E-Wallets, etc.

After successfully funding the account, the person is able to start trading in the U.S. stock market.

Taxation:

Some of the noteworthy aspects that should be remembered while making an investment in the U.S. stock market are that the tax-related details. It is clear that any person who isn’t a US-based investor and is making investments in the U.S. stock market should be prepared to deal with a substantially higher amount of taxes.

Generally, the non-resident investor has to pay a 30% tax on incomes gained from investments. These taxes are normally withheld by the respective online brokerage firm. 

There is an exception for people from countries that have a tax treaty with the United States. If the investor is from the country which has a tax treaty with the U.S., then they can enjoy the privilege of paying a lower amount of taxes as we have discussed earlier. 

The countries which have a tax treaty with the United States are Armenia, Australia, Austria, Azerbaijan, Bangladesh, Barbados, Belarus, Belgium, Bulgaria, Canada, China, Cyprus, Czech Republic, Denmark, Egypt, Estonia, France, Finland, Georgia, Germany, Greece, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Jamaica, Japan, Kazakhstan, Kyrgyzstan, Korea, Latvia, Lithuania, Luxembourg, Malta, Mexico, Moldova, Morocco, Netherlands, New Zealand, Norway, Philippines, Poland, Portugal, Pakistan, Romania, Russia, Slovak Republic, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Tajikistan, Thailand, Trinidad, Tunisia, Turkey, Turkmenistan, Ukraine, Union of Soviet Socialist Republics (USSR), United Kingdom, United States Model, Uzbekistan, and Venezuela

The W-8BEN form generally expires for 3 years time span, hence, it advised to renew it. If a person fails to do so, he/she have to deal with taxes like that of a foreign individual even if they are from a country that has a tax treaty with the United States.

For alien residents (green card holders) the tax is almost equal to that of the native Americans because of the tax imposed on worldwide income by the IRS. So, the tax for non-native residents is the same as that of the native citizens.

Conclusion:

Even being from a country other than the United States, a person might be able to make an investment in the U.S. stock market by creating a brokerage account from an online broker following the step by step procedure mentioned above.

Alternatively, they can also trade in the U.S. stock while being non-residents with the help of some financial institutions which have access to the U.S. stocks. 

A beginner or an investor with an intermediate knowledge might not be able to successfully get profits by making investments on their own.

This is because an investor who has very a minimum level or an intermediate level of knowledge related to investments might not be able to regularly follow all the above-mentioned processes.

Therefore, we suggest the investors consult a financial advisor (like us) and make a perfect strategy for the execution of trades before they take any decision related to making an investment in the U.S. stocks while being a non-resident investor.

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