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Alternatives For Singaporeans For A Cheaper Entry Point To US Equities Markets
Education | 21 June 2013

By Mingze Wu, Market Analyst, OANDA

The US equities market has performed exceptionally well thus far in 2013, with major indices such as the Standard & Poor’s 500 (S&P 500) and Dow Jones Industrial Average reaching historical highs in recent months. However, since most of us reading this reside in Singapore, how can we join the party?

The traditional way is to open an account with a broker that has US access (either local or US-based). This may sound easy enough, but there are additional considerations and fees that complicate matters. Brokers charge custodian fees and commissions. There are taxes involved as well, because US stocks held by foreigners are subject to a 30 percent withholding tax and estate taxes on portfolios that exceed USD60K.

To buy US stocks, you would need US dollars. Some brokers offer currency exchange services for clients without USD, but typically charge a premium rate. As most brokers (if not all) do not accept cash deposits, traders would need to open a USD bank account (yet another hassle) in order to transfer USD into their trading accounts if they do not wish to use the brokers’ in-house exchange rates.

Once your account is set up and funded, there are still more complications. In order to trade stock indices, you will need to buy the component stock of the index individually. US stock exchanges do allow you to buy one single stock, unlike SGX, but the cash outlay (and time) needed to purchase one of every share of the 500 companies listed on the S&P index, for example, would be tremendous.

Commission charges and transaction costs will stack up heavily, but costs are not your only issue – you will also need to monitor and rebalance your portfolio in the event of Stock Splits, Special Issuance, and Changes to Components etc. It will be a nightmare trying to track the index accurately, and tracking error/risks emerges which will impact your returns.

Weigh The Alternatives
Financial instruments such as index funds and exchange traded funds (ETFs) come with professional fund managers who do the tracking for you – for a fee. Entry costs to these types of funds vary in terms of minimum cash outlay, but something they have in common is passing on transaction costs to investors. Some funds will also charge management fees and/or performance fees.

Liquidation of your index fund or ETF portfolio will take time, which may not be convenient for some investors. Another consideration: most brokers specify a minimum lock-in period for fund investments.
Contracts for difference (CFDs) are a third alternative to investing in the US equities markets – and others such as commodities and bonds.

CFDs are derivative instruments that mimic the price of an underlying asset – for example a stock index, commodity, or government bond. These popular derivative products allow investors to speculate on or hedge on movements in the underlying assets without the need to physically own those assets. That means you don’t need to pay some of the associated costs of ownership mentioned above. A trader’s profit or loss from a CFD trade is determined by the difference between the buy price and the sell price, plus or minus any interest credits or debits.

Other advantages to CFDs: the added possibility for short-selling – something that is not easily possible with funds or actual stocks – and the ability to use leverage to trade large positions with a small amount of capital. Lastly, investors can also avoid the nightmarish prospect of managing a complicated US stock portfolio by trading CFDs.

Test out CFD trading with a free, no-risk OANDA demo account.

This information is made available to you by OANDA Asia Pacific Pte Ltd.

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