How to Trade US Stocks from Sri Lanka
US Stocks. What could we add that hasn't been said or written about them? The US Stock Market (mainly composed of the New York Stock Exchange and the Nasdaq exchange) results from hundreds of years of fulfilled American dreams and a wannabe to the rest of the world. American Stock Markets experience an enormous influx of capital from the rest of the world. It has grown significantly and steadily over the last 100 years (Despite 2 World Wars, financial crashes, pandemics and, more recently, a new war in Europe). There are countless success stories, movies, series, and books about the American Stock Exchange and the companies that issue shares in it. For those investors in Sri Lanka that hold a balance in Rupee, whether it's a large or a small bank account, this article attempts to explain (in plain English) how to buy US stocks without being too cryptic or too simplistic. Without further introduction, let's get started.
5 Steps to follow when Investing in US Stocks from Sri Lanka
We start the article by detailing the five most important steps you need to follow when investing in US Stocks and Shares. We believe it was an excellent start to summarise the process's key points. So, here they are:
Set up your goals and the strategy you will follow to define whether you are a long-term investor or a day trader. Your plan should answer questions like: "Am I going to track the US economy's performance (via investing with an index-linked instrument), or am I going to pick each particular stock?"; "At what price am I going to cash in the investment?". Your strategy shouldn't be just a matter of buying one single share, no matter how profitable you believe it will turn, simply because that's not a strategy.
Choose the broker that best fits your strategy. This one is a crucial step; if you open an account with a Broker that you end up unsatisfied with, it will be problematic. Although you may open an account with another one, it's better to pick the right broker for you straight from scratch. Hint: Remember to check if the chosen broker opens trading accounts in Sri Lanka. Some brokers are restricted in terms of the residence, hence, not available to investors based in Sri Lanka. We display a list of some of the best brokers available locally in the following section.
Open a Trading Account with the broker (and fund it). Most Online Brokers will ask you to upload a few documents through their App, most certainly an ID or passport and proof of residence. Upload them, and they should take care of the rest. In 1-2 days, you are ready to go. Funding options range from credit cards to bank transfers and e-wallets. Before buying US Shares, the broker will ask you to complete the W-8 form, a US Internal Revenue Service (IRS) form that foreign individuals and businesses must file to verify their country of residence for tax purposes.
Apply your Investment Strategy. Once the broker confirms that your account is up and running and you deposit cash, it's time to apply your thoughts, investment ideas, and goals, in other words, your trading strategy.
Review your performance and calibrate the strategy as needed. You can't expect to get it right from the beginning. When investing, especially while you are starting, you will make mistakes. That's a given. Learn from them, and improve your strategy. And remember: Once you start investing, it will be an expedition you will walk your whole life.
Top Brokers for US Stock Trading [That accept clients living in Sri Lanka]
4 Ways to Invest in US Stocks
There are four basic ways to invest in US Shares. Although the 4 of them ultimately place your cash into stocks, the investment vehicle (and the level of diversification) differs.
A stock pick is when an investor concludes that a particular stock is a good investment. In other words, if the stock's price will rise or if it will pay (or keep on paying) dividends in the future. Stock picking can be challenging because there is never an easy way to determine the future's stock price. Forecasting is not easy. Stock picking contrasts with passive investment management, where the investor buys a passively managed ETF or Mutual Fund.
Stock Picking is the investing way that most investors start; by saying things like: 'I want to buy Apple Shares' or 'I've heard that the price of XYZ shares will increase significantly once the pandemic is over'.
Charlie Munger, a legendary investor (Warren Buffett's partner at Berkshire Hathaway), wrote 'Art of Stock Picking'. He defends this way of investing over diversifying an investment portfolio by asking:
'Who has 56 brilliant ideas? How many of you have two or three insights you have some confidence in? I rest my case.'
He tries to say that although diversification (or, in other words, buying many stocks across several industries) might decrease the risk of a portfolio, it is impossible to beat the market's performance. In Munger's view, an intelligent investor has to pick a few companies he believes in, buy the stock, and stick to them. To summarise, Munger's stock-picking strategy is to buy stocks of a few companies and keep them for an extended period.
To contrast Munger's investment strategy, another legendary investor, Carl Icahn, has said:
'My investment philosophy, generally, with exceptions, is to buy something when no one wants it.'
As a contrarian investor, Icahn identifies corporations with stock prices that reflect poor financial indicators, like low price-to-earnings (P/E) ratios or book values that exceed the present market valuation.
He then aggressively purchases a significant number of shares in the corporation and either push for the election of an entirely new board of directors or sell the company's unprofitable assets to deliver more value to shareholders.
As you may see, there are different (and contrarian) ways of investing by picking stocks. Stock picking is, in essence, the purest form of investing in American Shares. However, it's not the only one.
Which are the most popular shares? Google, Apple, Microsoft, Facebook, Tesla, Ford, GM, Walmart, and other gigantic American Corporations. For the record, this list is incomplete, varies with the trends, and does not represent financial advice.
Another way of investing in US Shares is via a diversified investment vehicle, for example, via exchange-traded funds or ETFs.
ETFs are this type of investment fund that invests in a portfolio of stocks, bonds, other assets or a combination of all of them. The portfolios may be index-based, such as the Dow Jones Index, the S&P500 (The top 500 companies that trade in the US), or by industry like energy, metals, technology, or financial services.
ETFs behave differently from traditional Mutual Funds because they trade at the stock exchange, just like stocks. In addition, ETFs trade at the current market price throughout the day like a stock, so you may buy and sell freely during market hours.
Over the last few years, investors have been drawn to ETFs because of their low price, tax efficiency, and trading ease. Like Mutual Funds, ETFs offer investors diversified exposure to a portfolio of securities, such as stocks, bonds, commodities, and real estate.
Which ETFs are popular? If you wish to invest in a portfolio that fully represents the American economy, you need to buy an ETF that tracks the S&P500 index (more info on it later). The most popular ones are the ones issued by Vanguard, SPDR and iShares since they are the most significant ETF asset managers by market capitalisation. However, if you wish to invest in a particular industry, you will find many more options.
Investors buy and sell mutual funds directly from a mutual fund company at the current day's closing price, also known as the NAV (Net Asset Value). As well as the ETFs, a Mutual Fund is a portfolio that invests in a basket of stocks, bonds, or other assets based on a predefined investment strategy.
One big difference between ETFs and Mutual Funds is that the investment portfolios are usually not based on an index but on the Asset Management team's decision (Delimited by the Fund's Strategy, which works as the Fund's laws and rules). Therefore, when acquiring units of a mutual fund, you may gain exposure to US Shares, as long as the Fund's strategy includes investing in them.
Several indexes represent the US Stock Market, but let's refer to the S&P500. The Standard & Poor's 500 Index, also known as S&P500, is considered the most representative US real economy index (The other one is the Dow Jones).
The S&P500 is built based on the market capitalisation of 500 large companies that issued shares on either the NYSE or the NASDAQ markets. It represents approximately 80% of the entire capitalisation of the US Stock Market. It differs from other indices in the US financial markets, such as the Dow Jones Industrial Average or the Nasdaq Composite index, in the diversity of the items that make it up and its weighting methodology.
It is by far the most invested stock index globally. Many people consider it the trend marker of the North American economy; that is, if the S&P500 goes up, the economy is doing well. Investing in a financial instrument that replicates the S&P500 Index is an excellent way to invest in a good portion of the North American economy through its corporate giants' shares.
Bottom line: There are many ways to invest in US Shares, from the least diversified stock-picking way (e.g. 'Buying Apple Shares') to the most diversified way (e.g. buying an ETF).
Frequently Asked Questions about Investing in US Shares
What is the minimum amount to invest in US Shares?
The minimum investment amount will depend on the share price. If the stock's value is low, you might not need a lot of money to invest.
Several brokers ask for a minimum deposit amount. The options presented above have a minimum investment amount of just a couple hundred US Dollars. So it is indeed quite accessible, although, for obvious reasons, your overall performance won't be very high if you choose to go with the minimum.
Which US Shares are hot right now?
We could provide you with a list including Google Shares, Tech shares in general, Energy, etcetera, but we won't do it. Simply because, when a Stock is 'hot', it is probably too late to invest in it. Always remember that financial markets price the 'hotness' of financial instruments almost immediately. So use your common-sense investment ideas, and follow your investment strategy. Avoid the articles, YouTube or TikTok videos titled 'Which Shares are hot right now?' simply because they were produced long after the heat was priced on the stock; hence it's too late.
Can Foreigners invest in US Stocks?
We recently received this query from an investor based in Colombo, and we thought it was essential to answer this question since it's widespread to doubt if it's possible to invest in US Stocks if you don't live in America. Buying shares from American companies is not restricted to US citizens, so you may buy US Stocks from Sri Lanka. However, you must check how investing in them will affect your local tax position.
Sorry, I'm a beginner. What are Shares?
Companies issue shares to access capital to fund their business growth. Company shares refer to an indivisible capital unit expressing the ownership relationship between the company and the shareholder (if you buy the stake, you would be a shareholder). The denominated value of a share is its face value, and the total face value of issued shares represents a company's capital.
Where do US Shares Trade?
US Shares trade in several Stock Exchanges across the US; however, the main ones are the New York Stock Exchange (NYSE) and the Nasdaq exchange. Based on the mythical Wall Street, the New York Stock Exchange is the #1 Stock Exchange globally by market capitalisation, where shares and bonds of the titanic North American corporations trade. Nasdaq is the second one in importance, and it's where the major Tech companies (like Apple, Google's parent company Alphabet or Microsoft) are listed.
What is a stockbroker?
In stock market jargon, a broker is a firm that executes 'buy' and 'sell' orders for an investor for a fee or commission. In short, a broker is an intermediary through which you can buy and sell stocks of American companies.
Why is it important to choose the right stockbroker?
Let us use an analogy to explain better why it is vital to choose the right stockbroker when buying US stocks. Think about going to the doctor. You want to go to the best one available; however, you may not be able to afford their fees. So, when you need medical attention while travelling, you have to find a professional doctor and one you can afford. Now, choosing the right stockbroker is similar. There are technical differences between brokers, but the critical point is evaluating the differences in the fees and commissions they charge.
So, if you want to invest in a few US stocks, think about which one offers the lower costs. If you require more sophisticated financial instruments, you should consider other details.
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