How can one go about investing one's dollar in an offshore market without incurring traveling expenses and enduring bureaucratic procedures imposed by foreign financial institutions on non-residents?
There is a service offered by brokerage firms, frequently referred to as cross-border trading, though some firms may coin their own monikers, the facility allows one to trade shares listed on an offshore exchange by executing buy/sell transactions either online or by calling remisiers attached to brokerage firms. In other words, people can buy and sell foreign listed shares from the comfort of their own home.
Investors can also use this service to monitor price movements of their shares and the value of their share portfolio on a real-time basis.
The downside to cross-border trading is that you are left to do the detective work yourself when buying stocks. The more hands-on type of investor would probably enjoy the freedom to choose their stocks, but brokerage fees and other expenses are charged on each buy and sell trade.
To offer the facility, the local brokerage firm must be a member of the foreign stock exchange concerned. As membership has a cost tied to it, brokerage firms are not likely to offer this service for all stock exchanges around the world.
So, if you have a specific offshore company that you want to invest in or are interested in blue chip shares of a particular hot economy, for instance, China or India, the first thing you need to do is find out if the brokerage firm you using or planning to use offers cross-border trading for that respective stock exchange.
To get started, in most cases, there are the administrative procedures of opening a share trading account with the brokerage firm, opting for online services and signing the supplementary terms and conditions for trading in offshore securities. The harder-to-meet criterion for most investors is the requirement for large amounts of cash; most firms request a minimum deposit and cross-border trading is normally based on collateral.
An obvious barrier to the popularity of cross-border trading is the cost. Investors can expect to pay a brokerage fee, stamp duty, clearing fees and other charges. For instance, investors going into the Hong Kong market would have to pay stamp duty of 0.1%, HKSE trading fees of 0.005%, clearing fees of 0.003% with a minimum of HK$3 and a maximum of HK$200 as well as a transaction levy of 0.005%.
As brokerage fees contribute significantly to the total cost of trading in offshore shares, investors should be aware of how much each brokerage firm charges.
Cross-border trading is not much more expensive than investing in locally listed shares. With regard to taxation issues, there are no taxes levied on capital gains arising from the disposal of offshore shares. As for dividends, certain countries may impose income taxes and possibly withholding taxes.
Investors should be aware, though, that globalizing their portfolio with cross-border share trading requires a certain amount of know-how.
While cross-border trading carries more risk and investors need to put in more effort to make wise investments, its availability for a well-diversified portfolio with the potential for greater returns.