- Ready to trade in US shares but not sure where to start?
- We explore US stock exchanges, asset classes you can trade in and how to choose a broker.
- How to set up and fund your trading account, and use market, limit and stop loss orders.
- How to limit your US and Australian tax liability.
Investing in stocks is one of the best ways to create and grow long-term wealth. And recent advancements in technology and increased competition have made access to the purchase of international securities, such as US shares, easier and less expensive.
The US stock market is considered one of the world’s most aggressive yet attractive markets. Many international companies, and emerging companies with high growth potential, also list their shares on US exchanges.
So, how do Australians invest in US shares?
We investigate the whole process, starting from what to get your head around first, through choosing a broker, setting up your account and deciding what type of securities to trade, and the basics of navigating the US and Australian tax systems.
In this guide
What you need to know before you start
If this is your first time trading the US market, there are a few things to know before you get going.
Rather than having just one exchange, the US has multiple exchanges, with NYSE and NASDAQ being most popular, followed by CME.
NYSE – New York Stock Exchange
NYSE listing is limited to blue chip companies – think Exxon, Citigroup, General Electric – with very high shareholders’ equity (USD 4 million+). The exchange still has a physical trading floor.
NASDAQ – National Association of Securities Dealers Automated Quotation System
Stocks listed on NASDAQ are generally known for technology and innovation. It’s home to Apple, Microsoft, Amazon, Alphabet, and other companies at the cutting edge. NASDAQ is a fully electronic exchange.
CME – Chicago Mercantile Exchange
Originally dealing in agricultural futures, CME now trades in precious metals, foreign currencies, treasury bonds, cryptocurrencies and many kinds of derivatives, even including the weather.
Compare share trading platforms to start investing in the US markets.
The five main US asset classes you can trade in are shares, bonds, ETFs, REITs and derivatives.
Shares (also known as stocks or equities)
Shares represent part ownership of publicly traded companies. They are traded on stock exchanges such as the NYSE or NASDAQ. Market capitalisation (number of shares issued x current share price) determines if they are large-cap, mid-cap or small-cap shares.
Bonds are fixed income debt instruments that pay a return in the form of interest (e.g. government-issued bonds, company bonds, municipal bonds).
Exchange Traded Funds are baskets of securities designed to track the performance of market indices or sectors, commodities, bonds, or a combination of investment types. An example is the SPDR S&P 500 ETF (code: SPY) which tracks the S&P 500 Index.
Real Estate Investment Trusts are investment funds with a portfolio of income-generating real estate properties, and their shares or units are publicly traded on a stock exchanges.They offer a more liquid form of real estate investment than owning actual property. REITs may specialise (e.g in residential, retail, industrial or hotel property) or have diversified portfolios.
Derivatives are contracts whose value is based on underlying assets, such as shares, commodities or currencies. Common types of derivatives include futures contracts, forward contracts, options, swaps and warrants.
Depending on where you live in Australia and where each US exchange is located, there could be a time difference of around 15 hours to consider. This means that most US trading hours will fall during the night in Australia.
You can manage your exposure to price fluctuations while you are sleeping by using orders other than market orders (see below, under ‘Setting the order type’). Another option is to set up alerts to notify you when a certain price point is reached for a specific share, even if you’re sleeping, but this feature may only be available with a premium account.
Day trading capital requirement
Although this only applies to day traders rather than longer-term investors, anyone planning short-term US share trades needs to be aware of the capital requirements for day traders.
US regulations require that day traders have a minimum of $25,000 in a trading account with their broker, so that they can demonstrate an ability to withstand a series of losses, as well as take on large volume trades with a small percentage profit potential. This is a minimum amount, and many trading experts suggest an even higher sum.
Picking a broker
Once you’re ready to start trading in US securities, your first step will be to select a broker. There are three main features Australians wishing to invest in US securities should look for in a broker:
- Online trading. This ensures ease of transactions.
- Commission-free of low-fee. Avoid transaction fees, or pay low fees, and keep your costs down.
- Mobile app. Give yourself the ability to monitor your investments and make transactions on the go.
Other considerations include the quality of information offered (pricing, reporting, research) and whether it’s possible to make fractional investments in high-value stocks like Alphabet (NASDAQ: GOOGL), Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT) Netflix (NASDAQ: NFLX), and Tesla (NASDAQ: TSLA) or meme stocks like GameStop (NYSE: GME).
Brokers to trade US markets
There are three brokers definitely worth considering by Australians, for trading in US shares.
eToro is one of the world’s largest social trading platforms, offering trading in shares (including fractional shares), ETFs, commodities, derivatives, cryptocurrencies and more, both online and via the eToro app.
Once again, there’s zero trading commission but a small currency conversion fee, plus an inactivity fee if you don’t make any trades for 12 months.
The ‘social trading’ aspect includes interacting with fellow investors on the social news feed, and the ability to copy the moves of particularly successful traders on the platform.
- Trade and invest in top financial instruments, including a wide selection of stocks.
- eToro is regulated by CySec, FCA and ASIC.
- Your funds are protected by industry-leading security protocols.
SelfWealth is slightly different in that it gives Australians the ability to invest in both Australian and US securities via a single platform. There’s a low flat fee payable for each transaction – $9.50 at the time of writing – and the minimum trade amount is $500.
Like its competitors, SelfWealth offers a free basic account plus a fee-paying premium account for seasoned investors (with free access to the latter for the first 90 days after opening an account). A small currency conversion fee is payable to fund US trades.
- Open an individual, company, trust, SMSFs or joint account for free.
- Provides commission-free trading – you'll never pay more than $9.50 brokerage and there are no account fees.
- Trade with confidence with free trading tools, including market depth and live pricing.
Stake has been operating in Australia since 2017. It offers commission-free online access to trading in over 3,500 US shares and ETFs, via a user-friendly UI and mobile app. Fractional share investing is available.
Although there’s no trading transaction fee, you will pay a small forex fee when you deposit or withdraw AUD into or from your USD account, plus a USD 2.00 withdrawal fee. This is fairly standard practice for online brokers.
A premium account, for which a monthly fee is payable, is available for experienced investors looking for advanced features.
- Get $10 when you fund Stake AUS or a FREE US stock when you fund Stake Wall Street. Do both, get both rewards.
- Make trades in seconds on over 8,000 ASX and US stocks and ETFs.
- Clear, simple, and better pricing with no hidden fees.
Superhero is the newest kid on the block. Homegrown Australian share trading platform that gives a younger demographic cheap access to Wall Street, simple graphs, app and web app.
- Open an account with just $100 and start investing today with a $5 flat-free brokerage ($0 on US shares) on share trades.
- Buy and sell US shares & ETFs with $0 brokerage plus trade unsettled funds.
- Fund your account in minutes with PayID and enjoy realtime FX transfers for fast US share trading.
Setting up your account
All the brokers listed above have a straightforward step-by-step online process for opening an account, including providing proof of identity and your linked bank account details. Then, in order to start trading, you’ll need to fund your trading account. This involves transferring AUD into your USD trading account and paying a currency conversion fee, typically between 0.5% and 0.7% of the amount transferred.
Stake and eToro both offer fractional shares and low minimum transaction amounts for shares and ETFs, but the minimum trade size at SelfWealth is $500.
Choosing which securities to trade
If you are a relatively inexperienced investor you will probably want to limit yourself, at first, to trading in shares, ETFs, and possibly REITS. But as you gain more confidence and experience you could choose to venture into derivatives and cryptocurrencies, providing you have a decent appetite for risk.
All securities investments come with some degree of risk, but derivatives trading requires more knowledge, and both derivatives and cryptocurrencies can be particularly volatile.
Setting the order type
Once you have identified a particular security you want to trade, you enter the respective symbol and number of units you want to buy/sell in the trading platform. Depending on the account type you have (i.e. basic or premium) you may have several order types available to you.
- Market order. You trade stocks at the prevailing market rate (which means the opening price at the next session if you initiate your transaction outside US trading hours).
- Limit order. You select a price point at which you wish to buy or sell. As the price moves during the day, if it hits the price point you chose, then the trade will be executed based on your order.
- Stop loss. This is usually used when selling a security. Similar to a limit order, if the price of a security hits a certain price point, based on your order, then the sell order is automatically executed. This function allows you to automatically sell your shares when the price dips below a certain level, thereby stopping any further losses.
Registration and tax considerations
The US government requires foreigners wishing to trade in US securities to fill out a W8BEN form to avoid paying a 30% withholding tax on share sales and dividends. A valid W8BEN form will allow you to pay no withholding tax on sales and only 15% on dividends (with the latter usually able to be offset against your Australian tax).
Your online broker may be able to help you with the W8BEN form.
As an Australian resident you must declare all your income, including dividends from foreign sources, when filing your Australian tax return. Tax withheld by a country that Australia has a tax treaty with (including the US) can usually be claimed as a tax credit on your return, thus avoiding double taxation.
Capital gains tax
When you sell your securities and realise a gain, those gains are usually subject to capital gains tax at your marginal tax rate. Capital gains occur when the selling price of the security exceeds the purchase price, including any fees.
How to reduce capital gains tax
By holding an investment for over 12 months, tax on capital gains is reduced by 50%. For example, if you purchased a security on 1/1/2020 and sold it on 2/1/2021 for a gain of $2,000, then your capital gains would be only $1,000 (50% of $2,000), and tax would be applied to a $1,000 gain. But if you sold in under 12 months, say on 28/12/2020, you would be taxed on the entire $2,000 of your capital gains.
More information on foreign tax credits and capital gains is available on the ATO’s website.
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