Investing in Overseas Stocks: So Easy That You Can Do It at Home
Many Singaporeans invest in the domestic market but are quite wary about investing overseas. This is because of the fear of the unknown and an uncanny comfort with the home market.
Asian investors have a long history and tradition of conservative saving habits, so direct investment in overseas stock markets is relatively new. For all retail investors, however, access to global markets does remain somewhat limited.
It is relatively simple for US investors to invest directly in European stocks, and for UK retail investors to access US stocks. On the other hand, neither the US nor UK retail investors can easily invest directly in Asian stocks, let alone stocks in emerging markets.
This is largely due to various restrictions on financial institutions which have been in place to protect local investors, and as a form of local protectionism. Asian financial markets have been slower to allow access to global investment for retail investors.
The good news is that globalization, with the help of the internet and online trading, is forcing change in many countries. Therefore, international investment will only get easier. There are already investors around the world trading stocks on major global stock markets. Especially with the younger generation in Asia, there is a growing appetite for looking beyond domestic financial markets.
For example, the Nikkei 225, Hong Kong Hang Seng, and Singapore Straits Times are just a few of the indices with which many Asian retail investors are very familiar. Some retail investors, day traders in Japan, for example, are actively trading stocks in other Asian, US, and European markets. Some semi-professional retail investors in Singapore and Hong Kong are also actively trading around the region, and indeed around the globe. It is probably fair to say, though, that the strategy is often focused on currency rather than the underlying fundamentals of individual stocks.
What does investing in overseas markets mean?
Simply put, investing in overseas markets means buying stocks and assets of companies outside Singapore. But does it mean investing only in trophy companies, like Facebook and Apple? Yes and No.
It can also mean investing in emerging markets that are fast becoming the drivers of global growth. Emerging economies are growing at breakneck speed–almost two or three times faster than developed nations such as the US, according to estimates by the International Monetary Fund.
Prudent investors are advised to look for investments in emerging markets that show high potential. Morgan Stanley’s Emerging Markets Index mentions Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey and Venezuela.
Today, more and more investors are investing in overseas markets.
Taking the first step to investing overseas
There are many reputable brokerage houses in Singapore, and the majority offer the option to invest in overseas stock markets. Although you can also open an account in a foreign brokerage market, it is always recommended to use your local brokerage account, as it is simple and convenient.
If you are intending to invest in overseas stocks, you want to choose a brokerage account that provides you access to multiple markets, not just one.
For example, Dollars and Sense tells us that OCBC Securities enables you to trade on 15 global exchanges, including the NYSE and Nasdaq in the US, the HKEX in Hong Kong and the Bursa Malaysia, just as easily as they would for Singapore-listed stocks on its iOCBC online platform and mobile app. Customers can gain access to even more global exchanges by calling their OCBC Securities trading representative.
When starting on your investment journey, keep in mind that you are doing the same thing that you were doing before, it’s just that you have cast a wider net. You have an array of options to choose from. Singapore investments surpassed Chinese investments in U.S. commercial property by $1 billion in 2017, a clear indication of the steady rise of the nation’s global investments.
The market is experiencing a meteoric rise, so make the most of it. By missing out on foreign markets you are missing out on the opportunity to ride on the crest of wave fueled by many corporations and countries. The Singapore stock market is irrefutably one of the most mature, diversified and self-stoking in the world, but investing abroad helps reduce correlation, which in turn reduces risk. Also, many foreign markets are more affordable.
Having that option to invest in US or any other overseas stock can be seen as an opportunity or a risk at the same time. Local investors who have all been taking profits through local stock investments all along may perceive this overseas venture to be risky as it might entail a complicated process along with other additional fees that may be imposed. Investors may feel that this journey might involve some tricky and complex process, but in reality, it only requires a couple of simple steps to be taken before you are able to own US stocks.
Times have changed and technology has made our lives so much easier. No longer do you have to be a US resident to be able to own US stocks. With just a couple of clicks in the comfort of your home, local investors are able to long or short foreign stocks even in Singapore!
Why the need to invest in overseas stocks?
Foreign stock exchanges such as the New York Stock Exchange (NYSE) provides more liquidity and volatility that are of a different scale as they are home to major companies such as Alphabet (the parent company of Google), Facebook, Apple, Coca Cola, and Mcdonalds. With the option and luxury to cherry pick from over 50,000 listed companies in the world, investors would be able to diversify and strengthen their portfolio globally. For retail traders/investors, who are veterans to the local SGX scene, depending on your style of trading and capital involvement, this may actually be in favour to them. Most dividend paying US companies are also offering decent returns if local investors are looking to diversify their portfolio & higher returns.
Picking the right brokerage
This is crucial as most retail investors will typically stick to a brokerage after settling down with them. With the right brokerage, you are able to save on transactional fees, cheaper custodian rates, smaller minimum deposits, a better user interface platform to monitor your charts, and easier withdrawals. Most local trustworthy brokers such as Philips Securities (Poems), UOB Kay Hian, May Bank Kim Eng, OCBC Securities, and DBS Vickers are where you can open an account with. A general rule of thumb is to source for the right brokerage that would grant investors access to the more popular and major stock exchanges worldwide.
Mandatory declaration forms
Upon selecting a brokerage that fits your investment style, there are a couple of mandatory forms which need to be filled and submitted. A W-8BEN form is a requirement by the US Inland Revenue Service (IRS) for anyone who is a non-US resident who wishes to trade in the US stock market and to declare that you are the beneficiary owner of any amounts received coming for the US. This form is to only be completed by non-US residents only. You will be asked by your broker to complete this form as long as you want to trade in the US stock market.
Other than a W-8BEN form, brokerage firms will typically require an acknowledgement form along with their terms and conditions just to make sure that all investors are aware of the risks that come along with it.
Fees & charges
No matter which brokerage you have an account with, there is a small fee deducted that is used to pay the US regulators when you let go of your US shares. This small fee includes a Securities & Exchange Commission (SEC) fee of 0.00174% which will be deducted off every trade value made.
There would also be local taxes depending on per trade or a monthly deduction from the overall profits in the form of GST. Other than that, investors should also be aware of the difference in the currencies.
Custodian fees are usually imposed as long as you are in possession of any foreign stocks that you purchase through brokerages in Singapore. It is a fee that will be imposed on the investor if the stock is being held for over a period of time. But that being said, some brokers will encourage investors to take on more trades to have that custodian fee waived.
Profits and gains
Upon taking profit or dividends from any companies that you have successfully closed the transaction with, as long as it is from the US, there will be a dividend withholding tax of 30% levied off from your eligible dividend amount, meaning to say, if you were to gain a dividend of $100 off your US shares of a certain company, $30 will be deducted by the US government.
Compare and choose the right one
Make use of comparison sites such as ValuePenguin as they provide an overview of the several brokerage companies and their rates at a glance. With the help of such sites, you are able to make a better-informed decision without going back and forth to compare commission rates, minimum fees, account deposits, and so on.
Every different foreign or global brokerage, in general, would have access to most of the stocks that are in demand. It depends on the type of investor or trader you are, the strategy that you would adopt and the capital, but some may feel that a per trade commission is much better than a monthly commission fee. However, a monthly minimum fee charged would be better if your capital is only a few thousand dollars. Every retail trader has their own go-to platform as it fits their capital requirement, investment style, and the kind of commission they are able to forgo. You can make comparisons to see which fits you best.
Some mutual fund disadvantages of which to be aware
Investors in international stock funds will typically face higher fees, and the more ‘exotic’ the investment location target of the fund, the higher the fees.
Global funds also come with their own set of risks as they are often unhedged (unless specified otherwise in the fund prospectus – always check this!). For example, if a fund is invested primarily in European based companies, the investor will now be exposed to exchange rate fluctuations between his home currency and the euro. This currency exposure can have an even greater impact on performance with emerging market funds, which have historically seen significant currency devaluations over the course of a business cycle.
An Asian investor seeking global diversification should certainly give consideration to a global mutual fund. These days, there really ought to be a place in every portfolio for international investment. Even the most conservative investors need a strategy to provide better diversification and overall returns to a portfolio.
Once you have made up your mind to start investing, there are two questions you need to answer. First, how much international exposure do you want? Second, what should you invest in?
For the first point, diversification is the key.
You should not fall into the home bias. You should have a globally diversified portfolio. Of course, you would be more comfortable with investing in home stocks. However, it is best to remember that foreign stocks may give you better returns at times. The principle of diversification, according to Professor Lewis of Wharton, is that a well-diversified global stock portfolio can potentially either cut your risk by a few percentage points a year or improve returns for the same level of risk as just holding domestic stocks by, perhaps, half a percent a year. The exact numbers do depend on your assumptions and time periods, but this is about as close as you get to invest in a free lunch. Yet, most investors do not take advantage of the connected world and stuff themselves up with their home stocks.
Second, what you zero in on depends on what your risk appetite is. Instead of investing in large trophy assets, it might be best to invest in small and niche assets that have great potential to be lucrative in the long run.
With Singapore on the road to recovery, Singaporean investors will continue to see-saw between domestic and overseas investments. If you wish to ride this road to recovery, spread your portfolio with some investments cherry-picked from overseas markets.