Trading Stocks While Living Overseas — A Guide
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Trading stocks while living overseas is actually a thing since geography doesn’t really restrict your investment options. In fact, buying overseas stocks enables you to diversify your portfolio by distributing your risk, on top of increasing your exposure to the expansion of other economies.
Trading Stocks While Living Overseas: American Depositary Receipts
The use of American depositary receipts (ADRs) makes it simple to acquire international stocks. ADRs are used by foreign businesses to enter US markets and raise money on occasion. They have three levels and can be sponsored or unsponsored.
Although they cannot be used to generate money, first-level ADRs can be utilized to develop a trading presence in the US. They are not sponsored, hence they are limited to over-the-counter trading. Second-level ADRs, on the other hand, cannot be used to raise funds but can be utilized to create a trading presence on a national exchange like the New York Stock Exchange (NYSE). Level-three ADRs can be utilized to raise money as well as list on local exchanges.
An underlying share or number of underlying shares is represented by each ADR that a foreign business issues. The listing, trading, and settlement of these ADRs are identical to those of US domestic company shares. They are therefore a practical way for the typical investor to hold international stocks.
Trading Stocks While Living Overseas: Global Depositary Receipts
Shares of foreign firms are issued by a depositary bank and made accessible to investors inside and outside the US on international markets, most often in Europe. Though some are pegged to the euro or the pound sterling, most global depositary receipts (GDRs) are priced in US dollars. The same procedures used for domestic stocks are often used for their trading, clearing, and settlement.
GDRs are traded on exchanges in Singapore, Frankfurt, Dubai, London, and Luxembourg in addition to other locations. Prior to being traded in public markets, GDRs usually are sold to institutional investors in private placements.
Trading Stocks While Living Overseas: Global Mutual Funds
If you want to test the waters in international markets without engaging in a lot of fuss, you can choose a mutual fund that specializes in foreign shares.
Mutual funds with an international concentration are available in a range of styles that’s suited for aggressive and cautious investors. Such funds could be particular to a region or a nation as well as track an international stock index passively through an index fund or aggressively through an actively managed fund.
You have to watch out for fees, though, since global mutual funds can incur higher costs and fees compared to their local counterparts.
Trading Stocks While Living Overseas: Foreign Direct Investing
Direct overseas stock purchases can be made through a broker in your own nation which can help you set up a global account and by opening a brokerage account in the target nation using a local broker.
Direct investing is not recommended for novice investors due to extra costs, tax repercussions, technical support requirements, research requirements, currency conversions, and other considerations that all need to be taken into account.
Additionally, investors must be on the lookout for dishonest brokers who are not registered with local regulatory bodies, such as the Securities and Exchange Commission (SEC) in the US.
Given such concerns, only serious and engaged investors should engage in foreign direct investment.
Trading Stocks While Living Overseas: Exchange-Traded Funds
An easy approach for you to gain access to international markets is through an international exchange-traded fund (ETF). Selecting the ideal ETF can be less complicated than building your own stocks basket.
There are ETFs which offer you exposure to several markets and there are those that are country-specific. They offer a range of investment options, including those based on market cap, geography, investment strategies, and industry.
IShares by BlackRock, State Street Global Advisors, Vanguard, Charles Schwab, Direxion, Guggenheim Investments, Invesco, and WisdomTree are a few well-known ETF providers.
You should think about expenses and fees, liquidity, trading volumes, tax concerns, and portfolio holdings before acquiring an overseas ETF.
Trading Stocks While Living Overseas: Multinational Corporations
You can look for domestic companies that generate a sizable amount of their revenues from abroad if purchasing foreign equities directly gives you much unease or if you are skeptical about ADRs or mutual funds.
This could entail purchasing multinational corporations (MNCs), such as the likes of McDonald’s Corp. (NYSE:MCD) or the Coca-Cola Co. (NYSE:KO), which both derive the bulk of their earnings from international operations.
Although it exposes investors to the global market, this tactic is rather indirect (perhaps even underhanded) and does not allow for true international diversification.
How Trading Stocks While Living Overseas Works
In order to acquire individual stocks on a foreign market, you must create an account with a global broker that allows for buying and selling of global equities.
Purchasing foreign stocks is identical to purchasing stocks on US markets once you have opened and financed an account with an overseas broker. You might need to seek access for the particular exchange or exchanges you want to trade on. To make sure you are trading the appropriate stock, you might need to investigate the exchange and ticker symbol as well.
There can be extra restrictions for some exchanges. Typically, buying and selling of foreign stocks must occur on the same exchange.
To control volatility, the Tokyo Stock Exchange and Osaka Stocks Exchange, for instance, impose daily price caps on all securities.
The majority of the time, buying and selling stocks internationally is more expensive. Before choosing your international broker, it’s a good idea to be aware of the fees, available nations, and assets.
Commissions and costs for trading stocks while living overseas, as well as potential currency exchange expenses, could vary from those for stock trades executed in the US.
Top Brokers for Trading Stocks While Living Overseas in 2022
A brokerage company that enables US and/or foreign investors to buy and sell stocks globally is known as an international broker.
Diversification and the possibility for growth, particularly in emerging nations, are two of the main factors that drive individual investors to trade stocks while abroad.
The majority of investment brokers offer access to overseas equities, ETFs, and mutual funds; nevertheless, serious investors who wish to transact on foreign exchanges must use an international broker.
New York-based financial services firm Interactive Brokers is one of the best brokers for trading stocks while living overseas, thanks to its comprehensive platform that allows you to trade stocks, options, futures, currency, crypto, bonds, and funds in 150 markets via a single unified account.
Interactive Brokers also has a news feed that allows you to catch on worldwide goings-on. The Impact Dashboard and app, on the other hand enables you to assess assets via a socially responsible investment lens, so if sustainability is something you’re interested in this tool is a really great feature of Interactive Brokers.
Professional traders as well as active investors interested in sophisticated technical and fundamental trading tools and in-depth research use the downloadable Trader Workstation program.
Because Interactive Brokers offers global access, you can fund your account in your home currency and then convert it at market rates to trade in markets other than your own.
International futures products, such as Eurodollar packs, Canada bond futures, UAE spot currencies, and Hong Kong government green bonds are among the growing offerings of the broker that are available to traders worldwide.
Interactive Brokers is one of the best for international trading thanks to its broad selection of tradable assets, several computer and mobile trading applications, minimal fees, effective order routing, and international marketplace. Other offerings that set the broker apart from its competitors are its research reports, access to international markets, tools, calculators, and instructional resources.
If you’re a foreign investor with limited resources, you can start off modest by trading fractional shares for US and European stocks. The paper trading account also enables novice investors to test their skills before investing real money.
You can receive support from the knowledgeable customer care licensed brokers with stock, fund, bond, and options investment, as well as instruction for straightforward to complicated trades and platform use. For international trade, the costs are made quite obvious, but you should still be ready because they differ from country to country.
For typical investors willing to relinquish the SmartRouting trade routing order feature, Interactive Brokers Lite can be a suitable alternative. Meanwhile, advanced, institutional, and professional traders are drawn to Interactive Brokers Pro because it trims rates for bulk orders and offers commission structures that improve with volume.
Pros of Interactive Brokers
- Offers an unmatched selection of investing assets, such as equities, ETFs, options, futures, spot currency pairings, cryptocurrencies, US spot gold, bonds, mutual funds, hedge funds, robo-advisors, and managed portfolios.
- The offered margin rates are some of the lowest. They are ideal for larger traders as fees decrease as order size grows and are up to 66% less expensive than the industry average.
- Thanks to Interactive Brokers’ SmartRouting feature, each leg of a trade can be automatically routed to the market maker with the lowest cost.
- Has a wide range of technical and fundamental trading tools, including the Trader Workstation and Client Portal trading platforms which offer technical research, interactive charts that can be personalized, single window access to live quotes, and analysis tools.
- Designed to assist international investors and traders who need access to 150 marketplaces across 33 nations as well as 24 different currencies. Interactive Brokers is available to citizens of a large number of nations who are not US citizens.
Cons of Interactive Brokers
- Interactive Brokers’ SmartRouting option is not accessible to Lite customers, which could result to them being unable to receive the best pricing on their trades.
- Can be overwhelming to less seasoned and less regular investors as arranging the enormous variety of goods and services in a way that makes them simple to find can be quite challenging.
Investors seeking a straightforward international trading platform could look into Boston-based financial service firm Fidelity International Trading, which offers access to the majority of the major global financial markets and currencies. Finding businesses that meet your requirements is also made simpler by Fidelity’s global research tools and screeners.
All of Fidelity’s assets, including mutual funds, stocks, ETFs, bonds, options, fractional shares, initial public offerings (IPOs), and warrants will be available to you, along with cheap fees and top-notch instructional materials.
The Fidelity international stock trading services may be simpler to use than those offered by Interactive Brokers for newbie investors who want to access global markets. One brokerage account can be used by investors to trade both domestic and foreign equities, with the potential to trade in 25 nations. Both US dollars and the local currency are acceptable forms of payment.
For individuals who want to venture beyond ADRs, international ETFs, and worldwide US stocks, Fidelity international trading can also be a good alternative.
With most fundamental features accessible on your phone or tablet, the Fidelity mobile app is regarded as being of high quality. Nevertheless, using the stock research feature returns you to the website.
Fidelity’s international trading services are worth taking into account if you want top-notch research, affordable pricing, foreign trading experts, and access to the most well-liked overseas markets.
Pros of Fidelity Investments
- Fidelity is inexpensive. The majority of account costs, including transfers, account closing fees, plus wire and check fees, are no longer charged. It also provides free stock and ETF trading. The cost of options is $0.65 per traded contract.
- Fidelity uses unique trade execution algorithms to route orders to up to 50 market centers, including exchanges, market makers, and automated trading platforms, in order to achieve excellent trade execution.
- The research options and asset screeners at Fidelity are outstanding, and customers can use screeners for stocks, ETFs, options, and fixed income securities. Screeners offer several parameters, watch lists that could be made from search results, as well as themes including cloud computing, drones, and environmental, social, and governance (ESG).
- Fidelity offers its clients a range of learning resources in a variety of media, such as articles, videos, live and recorded webinars, and infographics. As customers learn how to invest in or trade in various items, they can also chat with experts who have trading experience to review their trading ideas.
- Fidelity offers a wide range of calculators and tools that can be used to a portfolio or particular deals. It has calculators for options that show the likelihood that a trade will be profitable. Calculators from Fidelity are also available for setting financial objectives and monitoring portfolio performance.
Cons of Fidelity Investments
- One of the costliest in the brokerage sector are the broker-assisted trading costs at Fidelity which are $32.95 per trade. Looking for brokers with lower fees would be preferable for investors and traders who want broker-assisted trading.
- Without a cost cap, Fidelity charges clients $0.65 for each traded option contract on both the open and closing sides of the deal. In multi-leg options deals, this entails commissions on both the open and closing of both legs. So, high volume options traders could opt for a different broker if they want to trade options because there are those who don’t charge anything and limit commissions, as well as charge for merely one side of a trade.
Things to Evaluate in Selecting a Broker for Trading Stocks While Living Overseas
When selecting an international broker, look for the same qualities you would expect from any broker, such as a robust reputation in the sector, modern security standards, reliable client service, affordable pricing, solid trading tools, useful educational content, and access to the markets you want to trade.
A global broker’s provision of research reports, screeners, and worldwide news is crucial too. Due to different regulatory reporting requirements for international companies, it would be more essential to conduct thorough research before purchasing a stock in a foreign company than a US corporation.
Trading Stocks While Living Overseas: Opening a Brokerage Account for Non-US Citizens
Legal residents in the US who are not citizens are typically permitted to open US-based brokerage accounts, provided they submit the necessary documentation and confirm their tax status. You might also have to fill up additional tax forms that are necessary for citizens of other countries.
If the broker permits applications from their nation of residency, non-US citizens living outside of the US can also open an account. If you don’t live in the US, there may also be restrictions on the kinds of accounts you can open. Opening a brokerage account in your home nation that provides access to US stock markets could be your other option.
Certain Risks of Trading Stocks While Living Overseas
You can trade on overseas marketplaces thanks to a select few digital brokers. You can trade stocks, bonds, futures, and currencies, but you should be aware of additional dangers including low liquidity.
Setting up an account with a local broker in a foreign country may be a good idea if you have an interest in one or two foreign markets. The main concern here is that regulatory bodies outside of the US might not be as aggressive, and there are international brokerages that are notorious for winding up over night while snatching up the assets of their clients.
You could look into investing in a sector fund, which finances businesses in a specific industry or region, to reduce your exposure to such issues.
Emerging markets are viewed as rougher in general when it comes to volatility. They may see significant swings in market value, and political risk occasionally has the power to completely affect the course of a country’s economy. It should be emphasized that overseas markets may be less regulated than those in the US, which raises the possibility of fraud or manipulation.
Despite having exceptional access to worldwide news available throughout the day, investors now run the danger of receiving false info from a market that is thousands of miles away. This could make it more difficult for the investor to comprehend or interpret relevant events.
Fees can as well act as a significant barrier to trading stocks while living overseas. You could be better off picking one or two international mutual funds to bolster your overseas investment given the large availability of these funds and their experienced fund managers.
Last but not the least, the fluctuation in currency exchange rates is also a huge factor and risk to consider. Although it can be advantageous for you if such change in rates move in your favor, it can also totally hurt your investment should it move against you.
It’s definitely up to you if you’re ready for both the prospects and risks of trading stocks while living overseas. Note that foreign stocks can be a strong addition to an investment basket, just make sure to allocate just between 5% and 10% of your portfolio if you’re on the conservative side. You can increase that percentage up to 25% if you’re more on the aggressive side.
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