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Investing through a foreign broker: peculiarities and risks

Friday, September 17, 2021

How this niche works and what are the possible risks of investing through a foreign broker.

Startup Jedi

We talk to startups and investors, you get the value.

Investing through a foreign broker is a multitude of possibilities: but before “going out in the world”, it is better to figure out how this system works. In this article, we will help to understand how this niche works and what are the possible risks of investing through a foreign broker.

What is the point of investing through a foreign broker?

Investing through a foreign broker allows you to enter a foreign stock exchange, which significantly expands your investment opportunities. Through Russian stock exchanges, it is possible to buy only the shares of the largest international companies; in addition, there is no opportunity to invest in many profitable foreign index funds. Abroad, your investments will be protected by different legislation, which is usually more perfect than in Russia and the CIS countries.

Advantages of investing through a foreign broker:

  • Direct instant access to foreign stock exchanges and foreign assets.

  • Even more investment opportunities: stocks of thousands of companies, ETFs, foreign entity bonds, and so on.

  • Availability of foreign financial assets.

  • Insurance of your funds on brokerage accounts, which is carried out by self-regulatory organizations (there is no similar insurance in Russia).

  • The ability to hold assets in foreign currencies that are less prone to inflation.

  • A variety of investment conditions and offers from foreign brokers.

  • Any foreign broker conducts all investment operations online and remotely, so there is no need to go anywhere.

  • High transparency and reliability of the foreign broker market: thanks to the strict regulation of this area, investments are more safe. A reliable overseas broker is necessarily a member of professional associations and regulatory bodies, this is an important part of his reputation.

Difficulties and risks of investing through a foreign broker:

  • All brokers have commissions, so it is unprofitable to trade on foreign exchanges with small amounts.

  • Some brokers have a high entry threshold.

  • You need to have at least basic English knowledge to correctly perceive information and make transactions (but in fact, everything comes with skill and experience).

  • There is a risk of refusal to cooperate for political reasons (for example, when a Russian private investor is working with an American broker: over the past 2 years, brokers such as Ameritrade, Charles Shwab, E*TRADE, Firstrade, TradeKing have stopped working with Russians).

  • A foreign broker is not a tax agent: when interacting with him, you pay all taxes yourself: it is important to delve into the tax legislation of the country in which you plan to invest in order to correctly calculate all costs.

  • There is a risk of losses due to illiterate investments. Of course, before acquiring foreign assets, you need to collect as much information about them as possible and weigh all the risks. But this risk is typical not only for working with a foreign broker but for any investment in general.

  • The risk of running into a fraudulent broker. The foreign broker market is quite transparent and strictly regulated: almost all brokers are members of SROs, information about them is readily available. But if you rely on the first next "one-day broker" or transfer all your savings to a certain legal entity on the advice of a chat in Telegram, then you are likely to come across scammers. Ultimately, everything depends on you: to choose a high-quality, reliable broker with a good history, all the tools and opportunities are there for you.

Types of foreign brokers

Foreign subsіdiary structures of the Russian brokers

Legal entities of brokers are registered abroad (usually, in Cyprus) and are subject to the laws of these countries. In general, making investments through such brokers is easier than working with a completely foreign company. You can communicate in Russian, there is Russian technical support; and the commissions and the entry threshold for opening an account can be lower than American and European brokers have. Subsidiaries of Russian companies, usually, acquire shares and valuable securities not directly, but through other foreign brokers.

Examples: Whotrades Ltd (Cyprus) and Whotrades Inc (the USA) are owned by Finam, KIT-Finance Europe (Estonia) is owned by KIT-Finance, Atonline Ltd (Cyprus) is owned by "Aton".

American brokers

The main advantage of working with an American broker is that the investor gets direct access to American exchanges without any intermediaries. Another important advantage is account insurance for the amount of $500,000. All accounts opened with American brokers are immediately insured. The American Investor Protection Corporation is responsible for insurance, so any broker in the United States is a member of this organization. You can check your broker for membership at this link.

In addition, all US brokers are affiliated with FINRA, an organization that independently oversees the brokerage market. Due to the control of the organization, clear legislation and high competition among brokers, the American broker market is one of the most reliable and efficient.

A disadvantage is that many American brokers refuse to work with Russian clients due to political reasons. Among those who still want to work with investors from Russia are Just2Trade, Interactive Brokers, Place Trade, Lightspeed.

European brokers

European brokers also have compulsory account insurance of €20,000. The liquidity of assets on European exchange markets is lower than on American ones, there is also less choice for company stocks and ETFs (Exchange Traded Fund). Nevertheless, working on investments through European brokers is a good option, given that most US brokers have stopped working with Russian clients. Working with assets in a stable European currency saves you from the risks of inflation and currency surges.

Examples: Exante (Malta), Saxo Bank (Germany), CapTrader (Germany).

How to work with foreign brokers?

In general, the process of working with a foreign broker is exactly the same as with Russian brokers. The only thing is that you should pay special attention to the process of preparing and choosing a broker since you will be making investments in a foreign environment with different laws, rules and rates. 

1. Define your priorities

Why do you need and for what operations do you need a foreign broker? The selection criteria depend on this question:

  • If you plan to make frequent transactions on the account, trade on the stock exchange, and constantly increase investments, then you need a foreign broker with the lowest commissions, which will decrease with increasing the turnover.

  • If there aren’t many transactions, and it will be a long-term investment, pay attention to the payment for inactivity: it should be either absent or minimal.

  • Do you really need a foreign broker? If you aren’t quite confident in the English-speaking environment and you have little investing experience, then it is better not to take any risks. Try to start investing through subsidiaries of Russian brokers, where they have Russian-language support, the interface and rules of use that are most convenient for fellow countrymen.

  • In case you just want to invest in shares/bonds of international companies, you can do it through Russian brokers on international exchanges. A foreign broker is a tool for those who no longer have a little interest in offers from Russian brokers on companies, ETFs and various financial tools.

2. Choose the broker

When choosing a broker, you should carefully look at the following criteria (ideally, do make a table that will help you visually compare your options):

  • The country where the company is registered.

  • Account insurance (a possible substantial advantage).

  • Membership in the largest regulatory organizations.

  • Available exchange stocks.

  • Available trading tools.

  • Service rates and brokerage commissions.

  • The minimum capital required to open an account.

  • Availability of Russian-speaking support.

3. Know the conditions

Before choosing a broker, you need to be especially careful about all the financial conditions: tariffs, commissions for different types of transactions, and also calculate the taxes. Many brokers have such an option as a demo period for an account, during which you can try using the account and see if this company suits you.

Try to contact technical support and ask them questions: at the very least, this is necessary to understand how quickly the broker will provide assistance when the real problems appear. If the company is from the United States, be sure to find it on the Investor Protection Corporation's registry. Consider all the risks, because the investment amounts, you will have to operate while investing through a foreign broker, are pretty considerable.

4. Open an account and send the funds

The process of opening an account for all brokers is the same: you submit an application, send scans of documents, then the broker opens an account for you and then you transfer the amount, which is necessary to access the company's services. After that, you can use your personal account to carry out any investment operations. Specific operations are the topic for another conversation. In order to know where to invest in American and European exchange stocks, you need to understand ​​what investment instruments are, how they differ and know the specifics of the market.

The best foreign brokers for Russian private investors

Just2Trade. This broker was bought by Finam, the Russian holding company whose headquarters is located in Cyprus. A great advantage of the broker is a convenience for the Russian user: there is a Russian-language personal account and 24/7 technical support in Russian. The broker works on American and European exchange stocks, and not only with traditional types of investments, but also with cryptocurrencies. All accounts with the broker are insured; when working on the American market, there are quite low commissions. The minimum amount to open an account is $100.

Interactive Brokers. A large foreign broker from the United States, which is one of the first to respond to all the innovations and new trends in the world of finance: for example, the opportunity to perform operations with bitcoin appeared on their platform in 2017. The main competitive advantage of this broker is the best commission among US brokers. The company also has a high-reliability rating, and, what is especially valuable, the broker has not stopped working with Russian investors. This broker allows almost any exchange: North and South America, Europe, Asia, Africa. Investing on this platform is available literally to everyone: previously, the minimum entry threshold was $10,000, now you can work with a deposit of less than $1,000. The broker has a rather complicated system of tariffs, which needs to be properly understood; there is a commission for inactivity.

Exante. A young foreign broker registered in Cyprus. Refers to offshore companies, which also gives certain advantages to the investor. On this platform, you can work with more than 50 thousand assets from one account, any investment is available to you. Significant advantages: clear and favourable tariffs, quick access to any exchanges, the ability to perform operations with cryptocurrency. Minuses: the broker has a high entry threshold of $10,000 and there is no account insurance.

Lightspeed. An American broker company that is known for its low trading fees. This broker also continues to work with investors from the Russian Federation and the CIS countries. In addition to the standard insurance for $500,000, the broker has the opportunity to insure accounts for up to $25M. The company is a perfect fit for day trading, it provides access to many trading platforms. But there is a high entry threshold of $25,000, so novice investors simply won’t be able to appreciate all the advantages of this site.

Saxo Bank. One of the most famous European brokers headquartered in Germany. Today, the company manages assets worth more than $16B. This foreign broker insures each account for €100,000. Another advantage of the broker is transparency: the work of the company is controlled by regulators from different countries of the world: Germany, Great Britain, Singapore. Therefore, everything here is as reliable as possible, there are no risks of fraud. The threshold for entering investments with Saxo Bank starts at $10,000. Commissions for some operations can be higher than previous brokers.

Does everybody need a foreign broker?

There is nothing scary and dangerous in investing through a foreign broker: there are legal nuances that are worth understanding, but the rest of the investment mechanism remains the same with additional opportunities. Considering the option of investing through a foreign broker, you need to clearly understand why you need it. If you just want to have shares and bonds of foreign companies, they can be purchased through large Russian brokers with access to international exchange markets.

A foreign broker will expand the list of opportunities for experienced investors who have worked with Russian brokers and are ready to appreciate the advantages of foreign ones, as well as for those investors who are willing to devote a lot of time and resources to this activity.

If you are from these categories, then go ahead and act! Thoughtful analysis, a few calculations and everything will work out perfectly!

17 Sep 2021

 

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