How to invest in US and international stocks from Costa Rica – that will be the topic of today’s article.
Nothing written here should be considered as financial or any other kind of advice.
For any questions, or if you are looking to invest as an expat, you can contact me using this form, or via the WhatsApp function below.
Introduction
We all know companies such as Apple, Facebook, Amazon, Microsoft, WaltDisney, use their products, and services. But some of you are already shareholders of these and many other American or international companies and not only admire their success, but earn together with these giants on the growth of their shares.
To do this, in fact, you do not need anything supernatural, it is enough to purchase shares of these companies. In this article, we will analyze in detail the specifics of investing in American stocks from Costa Rica (actually you can invest in these stocks no matter what your location is).
The American stock market has shown steady growth since the beginning of the year and remains attractive for investments in the long term, experts say. So how can a Costa Rican investor enter the US stock market?
One of the richest people in the world, the legendary American investor Warren Buffett (Forbes estimates his fortune at $ 105 billion) last year said that in a hundred years the American Dow Jones index will cross the mark of 1 million points, which is 44 times higher than the current figure. In his opinion, the play for a fall in the American market is a “losers’ game” and will remain so.
Since the beginning of the year, the US stock market has been steadily growing, and key stock indices are hitting historic records. The S&P 500 has risen almost 14% since January, while the Dow Jones Industrial has gained more than 15%.
For a foreign investor, investing in the American market is a good way to earn income in foreign currency. In the long term, investments in the American market can bring an average of 10% per annum (including dividends).
The American market is attractive for its clarity, as it reacts logically to market news and is sensitive to the comments of officials. Therefore, the players have the opportunity to guess the direction of the market movement based on certain news. In addition, while in other countries the most profitable shares are held by companies that operate in the oil and gas sectors, in the United States, the range of profitable sectors is much more varied.
But anyway, this market is interesting, but it is not speculative. To get the maximum benefit, you need to invest in it for at least two to three years.
Experts remind that in the stock market you can not only win, but also lose, the risk of investments is associated with market fluctuations. The risk of the stock market exists on every exchange you choose, and the investor always has the risk of falling into a crisis.
One of the ways to enter the American market is to open a trading account with a broker by concluding an appropriate agreement. Probably only a few local brokers are members of American exchanges. The rest of the large brokerage companies are still working through intermediaries. When a client enters into an agreement with a broker, the agreement specifies that a third party will be involved in making transactions.
For transactions, the broker will take a commission, which now averages about 0.04% of the transaction amount. In this case, the broker will act as a tax agent for his client (he will have to pay personal income tax 13% of the profit, which consists of changes in the stock price and the exchange rate), and the client will not have to independently report to the tax authorities on income received from transactions with securities.
In theory, an investor can enter the market bypassing a local broker. Then he will have to independently conclude an agreement with an American broker for example. You will also have to report your income to your country’s tax authorities yourself.
You can go to a foreign broker with at least $ 10,000, while in the local market the entry threshold is much lower and starts on average from $ 1,000. In addition, American brokers charge a separate fee for maintaining an account (from $ 10 to $ 30 per month).
Another feature of the US stock market is its picky behavior towards the legality of the funds that the investor deposits into their accounts. If the amount with which you come to the broker is several hundred thousand dollars or more, then the broker may require a written explanation of the origin of the money and provide documents confirming that the person received it legally and paid all the necessary taxes from it.
What to invest in?
Analysts identify several sectors that can be considered market drivers and which show high returns. The leaders of growth since the beginning of the year are shares of companies in the IT sector (+ 26%), as well as securities of the healthcare sector (+ 19%).
Despite the fact that not all tech companies are profitable, the sector remains the favorites of the S&P 500 and the market as a whole. The experts advise buying blue chips from an index like Amazon. You can pay attention to quieter securities such as Microsoft and Intel shares.
Another sector that is considered to be a powerful market item to invest is biotechnology. This sector has a very increased growth potential, which makes it enough attractive for long-term investments.
However, some experts believe that it is easier to focus on the market as a whole, and not on individual securities. In case an investor is ready to add dollar-denominated instruments in his portfolio, then the easiest thing for him will be to focus on indexes, but not on individual stocks. If there is an opportunity to invest in the entire market as a whole, then this opportunity should be used. This can be done through index funds (ETFs), which fully invest in the structure that makes up the index.
How to invest in American stocks?
In order to buy shares, you need to open a brokerage account with a licensed broker and go to the exchange. American shares are traded respectively on the US stock exchanges. They are NYSE and NASDAQ.
The second one contains mainly stocks of high-tech companies, while the first one contains stocks of all other sectors, but this is not a mandatory rule. Also, shares of American companies can be sold on exchanges in other countries through the mechanism of depositary receipts, or through direct listing (the procedure for placing a company’s shares on the stock exchange) on foreign exchanges. You can use the following options:
- Open an account directly on the US stock exchange (NYSE and NASDAQ) through a foreign broker.
- Open an account on the American stock exchange through your country’s intermediary broker.
Investing in American stocks through a foreign broker
In this case, you get access to the American market directly, and to all exchanges without restrictions and to all financial instruments. So, for example, access to American bonds through local brokers is usually not provided, and when working directly, we will have access to these financial instruments as well. You should find brokers have American licenses to operate on the US stock exchanges.
Pros:
- Maximum access to all instruments on the American stock market.
Cons:
- The procedure for opening an account with a foreign broker is a little more complicated than through a local intermediary broker. You will need to independently fill out a questionnaire on the broker’s website and the American tax form W-8BEN, as well as scan your passport and attach it to the questionnaire. In terms of time, the entire process of opening an account takes 1-2 weeks.
- The language barrier. It should be noted that in the case of the broker InteractiveBrokers, this disadvantage is completely leveled. You will receive 100% Spanish-speaking support at all stages. There may be other brokers with Spanish-speaking staff, but we do not know of them. In all other cases, it is possible that you will have to correspond and communicate with the broker’s employees in English.
- Large starting amounts: from $ 2,500 to $ 10,000.
- Separate software and most often not suitable for your country.
- Independent registration of all tax returns.
If your choice is an American broker, check:
- Is he licensed by the SEC (US State Securities Commission).
- Is it a member of SIPC (analogue of the Russian Deposit Insurance Agency).
- Is it a member of FINRA (a private corporation with the status of a self-regulatory organization that monitors compliance with the rules of trading in the OTC market).
- Has the rating “high reliability” by international rating agencies Fitch, S&P or Moody’s.
Features of investing in American stocks
Perhaps the most important feature of stock selection in the American market is the huge selection of securities. It may seem that a wide choice is good, but for a novice investor, such a wide choice can turn into a real nightmare, and without the appropriate methods and tools of work, you cannot cope here.
The physical remoteness of American companies from us and the inability to “taste the company”. You understand the level of service, assortment, and often even visually one can say that the business of the company is improving or, on the contrary, everything is going badly.
You come across these companies from time to time in your life. What can you say, for example, about Citybank or Wallmart? You have heard these names, you may have even logged into Wallmart during your last trip abroad, but the level of your personal perception of this business will be lower anyway. Therefore, the analysis will have to rely only on numbers alone.
The American stock market is very developed and companies’ valuation by other standards may seem overvalued or even overvalued. For example, the average ratio of companies’ prices and earnings (P / E ratio – price on earnings) in the American market this ratio is 25. on average, an American company costs 3 times more than for example a Russian one. American companies may seem overvalued to us, but in fact, this share price is normal for the US market.
The reports of companies are naturally published in English, so you should also rely on your knowledge of the English language. Usually, the average university level of English is sufficient for translation of financial statements and annual reports. Also, a translator from Yandex or Google can come to the rescue.
Well, and the last point I would like to remind you that the Russian investor will pay taxes in Russia in accordance with the agreement between the United States and the Russian Federation on the absence of double taxation. Therefore, our investment income will be taxed at the Russian rate of 13%. It is also worth mentioning that when working in the American market, no tax incentives apply directly (you can read more about taxation of incentives for Russian investors in our article “Taxes on securities”).
How to choose American stocks?
So, you now know where and how to start investing in American stocks, but it is worth remembering that the determining factor of your success as an investor will be the ability to evaluate and select promising companies for investment.
As we have already said, the American market is very developed and has a huge number of stocks, so choosing and evaluating companies will be difficult. In order to facilitate the investment choice and subsequent assessment of companies, there are special web services and programs – screeners of shares (from English screener – literally translated as sorting, questionnaire or “screener”).
It may seem confusing at first, but buying stocks is actually pretty straightforward. Here are five steps to help you buy your first stock:
1. Choose an online stock broker.
The fastest way to invest in shares is through an online stock broker. Once you open and fund your account, you can buy stocks through the broker’s website in minutes. Other variants may include a full-service stockbroker usage or stock purchase directly from the company.
Opening an online brokerage account is as simple and fast as opening a bank account. What you have to do is to fill out an account opening application, provide an identity document, and choose whether you want to fund your account by mailing a check or transferring funds electronically.
2. Study the stocks you want to buy.
Once you’ve set up and invested in your brokerage account, it’s time to make your next step – which is picking a stock. A good place to start is researching companies you already know from your customer experience.
Don’t let the market fluctuations overwhelm you while you do your researches. The goal should be simple: you are looking for companies that you want to co-own.
Warren Buffett said, “Buy a company because you want to own it, not because you want its stock to go up.” By following this rule, he did well for himself.
Once you’ve identified these companies, it’s time to do some research. Start with the company’s annual report – specifically, the annual management letter to shareholders. The letter will give you a general description of what is happening with the business and provide context for the numbers in the report.
After that, most of the information and analytical tools needed to evaluate the business will be available on your broker’s website, such as SEC documents, conference call transcripts, quarterly earnings reports, and breaking news. Many online brokers are also giving tutorials on how to use their tools. They even give understandable seminars on how to properly pick stocks.
3. Decide how many shares to buy
You shouldn’t feel any pressure to buy a certain number of stocks or fill your entire portfolio with stocks at once. Consider starting small – really small – buying just one share to get a feel for what it’s like to own individual stocks and if you have the fortitude to get through the tough moments with minimal sleep loss.
You can strengthen your position over time as you master shareholder swagger.
New stock investors may also want to consider fractional stocks, a relatively new offering from online brokers that allows you to buy a fraction of the stock rather than a full fraction.
This means you can get into the high-end stocks of companies like Google and Amazon, which are known for their four-figure share price, with a much lower investment.
Many brokerage companies also offer a tool to convert dollar amounts into stocks. This can be useful if you have a specific amount that you want to invest, say $ 500, and you want to know how many shares that amount can buy.
4. Select the type of warehouse order.
There are many more fancy trading moves and complex order types out there. Don’t worry right now – maybe someday. Investors have built a successful career buying stocks with only two types of orders: market orders and limit orders.
Market orders
With a market order, you indicate that you will buy or sell the stock at the best available current market price. Since the market order does not set the price parameters for the trade, your order will be executed immediately and completely filled, unless you try to buy a million shares and reverse.
Don’t be surprised if the price you pay – or receive if you sell – doesn’t match the price you quoted just a few seconds earlier. The buy and sell price fluctuates constantly throughout the day. This is why a market order is best used when buying stocks that are not subject to sharp price fluctuations – large stable blue chip stocks as opposed to smaller and more volatile companies.
Keep in mind:
- A market order is best suited for buy and hold investors, for whom small differences in price are less important than ensuring that the trade is fully executed.
- If you place a market order “after business hours” when the markets close during the day, your order will be placed at the prevailing price the next time the exchanges open for trading.
- Read your broker’s trade disclaimer. Some low-cost brokers combine all clients’ trading requests to be executed simultaneously at the prevailing price, either at the end of the trading day or at a specific time or day of the week.
Limit orders
A limit order gives you more control over the execution price of your trade. If XYZ shares are trading at $ 100 per share and you believe the $ 95 per share price is more in line with your valuation of the company, your limit order tells your broker to hold and execute your order only when the sell price drops to that mark. level. On the sell side, the limit order tells your broker to part with the stock as soon as the rate rises to the level you set.
Limit orders are a good tool for investors buying and selling small stocks, which tend to have wider spreads depending on investor activity. They are also good for investing during periods of short-term stock market volatility or when stock price is more important than order fulfillment.
You will also face additional conditions that you can place on a limit order to control the length of the order that stays open. An all or nothing (AON) order will only be executed when all the stocks you want to trade are available at your price limit.
A good for the day (GFD) order expires at the end of the trading day, even if it has not been fully filled. A Good Till Cancellation (GTC) order will remain in effect until the customer turns off the power or the order expires; that’s anywhere from 60 to 120 days or more.
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Adam is an internationally recognised author on financial matters, with over 305.9 million answers views on Quora.com and a widely sold book on Amazon
