Which Brokerage and How to open a trading account?

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Nov 04 2007
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Some of you asked how on earth a non-U.S. citizen can open an account with the intention to invest U.S. stocks or to trade its options. The facilities to do so were there for years and the process was simple. It just that after the tragic Sept-11 incident the U.S. government has put on multiple processes in between to prevent money laundering or something similar from happening again. If you do not already know, just before Osama bin Ladin launched his attack on America, he was believed to have bought tons of “Put Options” on U.S. optionable stocks. As a result he made great fortune when the stocks plunged.

While there’re many brokerage houses offering you the facilities to trade the U.S. equity markets, they’re equally different in terms of their offerings. These brokerage houses also act as the market makers who while trying to make money from you, they also compete among themselves for that piece of commissions. If you do not know that competition breeds benefits and lower cost of doing business, chances are you’re living under the coconut shell.

Broker Firms AvailableIf you’re not a citizen of USA, then you’re an alien (no jokes). And as long as you’ve internet access, basically you can trade not only stocks or options but also forex, futures and bonds from over 70 global markets using a single account from such brokerage firms. That’s why countries such as Malaysia and Singapore have miles of catchup to do when you talk about financial globalization. Among the providers include TD Ameritrade, Scottrade, E*Trade, OptionsXpress, InteractiveBrokers and so on.

One of the reasons that I’m holding from writing an article about brokers is due to the fact that every traders or investors have their own preference – one’s meat could be another’s poison. Of course the other reason was the request from a reader who has not trade U.S. equity markets before slipped off my mind (and for that I apologize). Long story short, my preferred providers are InteractiveBrokers and OptionsXpress. Let’s talk about InteractiveBrokers.

Why InteractiveBrokers?

  • InteractiveBrokers’ strength is probably in its speed in execution. It makes sense because InteractiveBrokers (IB) was initially designed for professionals – not for newbies who’re still learning the ladder. And professionals’ main requirement is the performance in buying and selling on top speed. So, features such as nice looking chart wasn’t integrated into IB. However over times due to requests and competitiveness, IB deployed multiple features and functionalities to satisfy the customers.
  • InteractiveBrokers also offers one of the lowest commission rates, if not the lowest in the industry. Starting from US$0.70 per contract for options trading, it’s hard to find similar offer elsewhere. When you’re talking about scalping stocks or day-trading, commission is what matters and differenciate between a profitable and a losing trade.
  • IB application processesInteractiveBrokers provide you the best pricing based on “Smart Best-Execution Routing” which means essentially it searches for the best stock or options prices available from all the market makers out there – so that you don’t overpay.
  • InteractiveBrokers provides you both trading platform – web-based or client-based (Java) trading and hence the fast execution during buy/sell activities.
  • There’re more benefits but I’m not going to elaborate more as it would take pages. But there’s one thing that I don’t really like – I can’t have my preferred login name because IB will add some characters to the end of your login automatically as part of the security feature. So I can’t tell IB I want “FinanceTwitter” as my login name.

To apply via InteractiveBrokers, click on Individual Application form. Due to the multiple steps in applying for an account, I’m not going to show each of them here. There’re mainly 4 major processes of which each of them will have more mini-steps:

  1. Account Configuration
  2. Applicant Information
  3. Agreement and Disclosures
  4. Funding and Acknowledgements

I know it’s a tedious in opening the account but it’s better than fly yourself to the U.S. and subject yourself to body searches at the immigration. As for the funding, you can “TT or Wire” the money (do the USD-Ringgit conversion please) to IB together with several pieces of information that you will get after going throught the steps in online application. That’s why the Funding is the last step within the procedures.
IB application sample1IB application sample2Some of the brokerage houses try to attract you with minimum US$500 as the requirement to start an account but seriously it’s not sufficient. And if you plan to trade Google Inc.’s option, don’t even think about such amount. As for OptionsXpress, all I can say is this broker house provides probably one of the best features and tools in the industry. Depending on number of contracts you trade per month, your commission starts from US$12.95 a contract. Now do you understand why I mentioned earlier that InteractiveBrokers provides the lowest commission? Nevertheless if you prefer rich functionalites and nice-looking charts, then OptionsXpress is your choice. But I’ve to warn you that your trades might not get filled at the desired price because it’s web-based and any slow internet bandwidth will only worsen the situation. I particularly love their support which is in the form of “Live-Chat” – it’s superb.

So which one should you choose – InteractiveBrokers or OptionsXpress? It depends on what you need and mandatory requirements. If financial allows, why not open an account with both?

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Good article. This is the first time i read an detail article on how to trade in the US.

How about the tax system in the US and how is it going to impact malaysian trading the DJIA?

hello kris …

i knew this question will comes from the readers – the tax …

now, i’m not going to make this a big issue as i do not wish to wake the “hungry ghost” from taxing investors … the same reason that’s holding me back from writing such article …

now, when you’re an alien and you do not have staffs or servers within the soil of U.S. (that’s why you need to declare lots of info to U.S. authorities) then you’re NOT taxable … good news huh? you can take all the profit back home simply because you’re an alien …

cheers …

Thanks for the info. With year 2008, coming closer and closer..the minimum bursa brokerage =rm40, i think it is a better choice to invest in US.more volume and violatily..certainly a blessing for a option trader like you.

I heard alot of good news about Ameritrade, that it is the cheapest.. what do you think?

hello anonymous …

as i said one’s meat could be another’s poison … in what sense ameritrade is cheapest? it’s commission? could it goes as low as $0.70 as interactivebrokers?

anyway, if you’re happy with ameritrade, by all means, go with the flow … there’s no right or wrong as to which brokerage house is the better one, as long as both of you “click” … also note that brokerage houses constantly offer short-term or medium-term “offers” …

cheers …

Thanks for the article. In your opinion, how much would be the minimum sum to start with for a newbie?

Hi! I have no experience whatsoever in the stock market, not even in the local market. But I think it is a great opportunity to buy US stocks now esp with the current exchange rate. And I am currently learning from books, seminars and reading blogs such as yours. So this article is really great for a newbie like me.

I would like to open an account to start with US$10,00 but what do you think I should buy for long term investment while I try to catch up learnings to trade for short term?

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