Saturday, January 1, 2011

Choosing a broker for trading US stocks

Update: I have switched to Interactive Brokers away from E-trade. The choice of E-trade as recommended in this post is no longer valid. What can I say about Interactive Brokers as a customer in comparison? Customer support is on par. Everything else is better.

I have encountered several inquiries on internet forums on choosing a suitable broker for trading US stocks. I would like to share what I know and have done based on my own research gathered sometime ago when I hunted for a broker for US stocks. If you are a Singaporean looking for a suitable broker for US stocks, please read on.

If you are a Singaporean wanting to trade US stocks, then using a US broker will compare favourably with our local brokers. The trading fees charged by our local brokers are much more expensive compared to US brokers. US brokers commission fees range from USD9.99 to USD19.99 per trade. Unlike our Singaporean brokers who charge a percentage of the trading principal, the US brokers charge a fixed commission per transaction regardless of size. This can result in huge savings if your trading principal is large enough.

Interactive Brokers is amazingly cheap. I do not use Interactive Brokers and shall refrain from further comment.

Local brokers charge extra fees like custodian fees and handling fees (dividends, rights, splits etc). When your broker act as a custodian for your shares (holds your shares on your behalf), you incur the counterparty risk of losing your money in your brokerage account should your broker go bankrupt. The USD in your local broker account does not earn interest. USD held in your US brokerage accounts (E*Trade, Interactive brokers) pay interest. The SIPC( Securities Investor Protection Corporation) insures up to USD500k of equity, including up to USD250k in cash if your US broker goes bankrupt.

Singapore brokers will charge you GST (currently at 7%) taxes on the commission paid. You do not have to pay GST when using US brokers. This is no small sum if your trading frequency is high.

The hassle of using a US-based broker lies in transferring funds to the foreign brokerage account. In this aspect, E*Trade has done a good job. You can write a USD cheque to the E*Trade Singapore office and the funds will be transferred within a few days. No extra charges in the form of telegraphic/cable charges from the bank. One downside is that you have to open a USD current account so that you can get a USD chequebook. The minimum deposit sum is USD1000 for OCBC and DBS. This is a sum of money that you have to leave idling. Take note of the bank fees when transferring money from your US brokerage account back to your Singapore USD bank account (known as inward remittance). Choose the bank that charges the least inward remittance fees or does it for free. As of today, DBS does not charge inward remittance for its USD current account. OCBC used to do it for free in the past but recently started charging for this service. In fact, OCBC even started charging for chequebooks in SGD current accounts when it was free in the past. I shall be closing my OCBC USD current account and open a DBS account soon.

I do not want to sound like a salesman for US brokers. Using local brokers have their advantages. You do not have to deal with the hassles of opening a USD current account and leaving idle money there to meet the minimum deposit requirement. The greatest advantage lies in the favourable currency exchange rate compared to those charged by the banks. When you buy US stocks using a local broker, the currency exchange rate is quite good. If you compare it to that charged by the local banks, the banks are ripping you off. I do not have a solution to this rip-off. I shall be most grateful to anyone who can suggest a cheaper avenue where I can get a favourable exchange rate.

There are important things to note on the tax aspects of investing in US stocks. Taxes on US stocks held by foreigners are subjected to 30% withholding tax. As a foreigner, if your dividends on a particular stock is large enough, it may make sense to sell your holdings the day before it goes Ex-dividend. Then, on the day it goes XD, buy back your stock after it falls at the price to reflect the dividends paid. Due to the hassle and my small US portfolio, I have not tried this. But, I think it makes good sense to go through this hassle if your dividends are large enough to make a difference.

Foreigners are subjected to estate taxes on the amounts in the portfolio exceeding USD60k. It is advisable to create a joint account with your spouse so that she does not take a hit should you leave this world unexpectedly. It is not so much of a concern if your portfolio falls below USD60k. Even then, it will be easier for your spouse to withdraw your money upon your death if the account is a joint account.

I use E*Trade as my US broker. While E*Trade is cheaper compared to local brokers, it is more expensive relative to other US brokers. However, the advantage is that it has a Singapore office and is registered with MAS. If there are problems with the broker, you can just drop by the Singapore office. If you use a US broker with no office here and not registered with MAS, it is harder to get disputes resolved. Emails can be ignored conveniently. I also like the convenient fund transfer facility E*Trade has for its Singaporean customers.

Disclaimer: Due to bad experience on sharing advice regarding money, I wish to state upfront that I shall not be responsible for factual mistakes because I am not paid for sharing these information in the first place. However, correction to factual errors or better suggestions done in a polite manner are most welcome.

Picking the right Valentine. A much more difficult task than picking the right stocks

9 years ago, I wrote about choosing your Valentine from a value investing standpoint. What I wrote then still stands today, Beauty is over...