A Malaysian Investor's Guide to Buying US Stocks: 2024 Complete Guide

Investing in global equities can help diversify your portfolio and manage volatility. The US stock market, with a market capitalization over 100 times that of Bursa Malaysia, attracts many Malaysian investors looking to broaden their investment horizons. The US market, home to some of the world’s largest and most innovative companies, has seen its major indices like the S&P 500, Dow Jones Industrial Average, and NASDAQ Composite hit all-time highs in 2024, making it an appealing destination for robust investment opportunities.

For Malaysian investors, investing in US stocks offers several advantages. It diversifies your portfolio, helps manage currency fluctuations, and exposes you to different economic conditions. However, it's essential to recognize the risks involved. This guide covers everything you need to know about investing in US stocks from Malaysia, from understanding market dynamics to comparing trading platforms and managing risks.

Why Invest in US Stocks?

Before we look at the reasons why people invest in US stocks, we need to first understand what exactly constitutes the US stock market.

What Exactly is the US Stock Market?

The US Stock Market is one of the largest and most liquid stock markets in the world, attracting both domestic and international investors. The US Stock Market comprises several stock exchanges, with the Nasdaq and New York Stock Exchange (NYSE) being the most prominent.

Home to some of the world's biggest and most well-known companies, the US Stock Market features the "Magnificent Seven" tech giants: Apple, Microsoft, Amazon, Alphabet (Google), Meta (Facebook), Tesla, and Nvidia. These companies have transformed the global economy and continue to drive innovation and growth. In addition, other notable companies such as Berkshire Hathaway, JP Morgan Chase, and Walmart also trade here.

Beyond US-based companies, the US Stock Market also lists many foreign companies. European companies like Nestle, L'Oreal, and Unilever, as well as Asian companies like Alibaba, Tencent, and Samsung, are traded on US stock exchanges. This makes the US Stock Market a truly global marketplace, providing investors with access to a diverse set of companies from around the world.

The US Stock Market includes three major indices:

• Dow Jones Industrial Average (DJIA): Tracks the performance of 30 large, publicly owned companies in the United States.
• S&P 500: Tracks the performance of 500 large-cap companies listed on US stock exchanges.
• Nasdaq Composite: An index of more than 3,000 stocks listed on the Nasdaq exchange, known for its technology-focused listings.

Stock Markets Are on a Record-Hitting Spree

Stock markets worldwide are reaching new heights in 2024. Of the world’s 20 largest stock markets, 14 have hit all-time highs in May 2024 including the Nasdaq 100 and S&P500, while the Dow Jones Industrial Average crossed 40,000 for the first time ever. Major stock exchanges in Europe, Canada, Brazil, India, Japan, and Australia are also at or near their peaks.

The US stock market has been particularly impressive, with the S&P 500 setting 24 new all-time highs in 2024 after two years without one. US stocks have surged in a $12 trillion rally since late October, fueled by optimism for a soft economic landing with strong growth and cooling inflation. This has increased bets that the Federal Reserve will ease monetary policy soon.

Another significant factor is the enthusiasm for artificial intelligence technology. AI chip giant Nvidia alone is responsible for about one-fourth of the gains in the S&P 500. Alongside Microsoft, Amazon, Meta Platforms, and Alphabet (Google), these five stocks account for roughly 53% of the benchmark's rise.

Several factors are driving this unprecedented rally. Looming interest rate cuts, healthy economies, and strong corporate earnings are boosting market activity. Additionally, substantial liquidity is available, with $6 trillion sitting in money market funds, poised to enter the equity markets, further propelling the rally.

This remarkable performance of global stock markets underscores the potential for significant returns, making it an opportune time for Malaysian investors to consider diversifying their portfolios with US stocks.

Reasons to Invest in US Stocks

The allure of the US stock market for Malaysian investors is compelling, driven by its robust performance, diversification opportunities, and the sheer scale of its financial ecosystem. Here are some of the standout reasons why investing in US stocks can be a smart move:

1. Unmatched Capitalization: The New York Stock Exchange (NYSE) and NASDAQ together boast a market capitalization exceeding US$50 trillion. This immense market depth offers investors access to the largest and most influential companies worldwide. Whether you’re looking at tech giants, industrial behemoths, or innovative startups, the US stock market provides unparalleled opportunities to own a slice of the global economic powerhouse.
2. Exceptional Liquidity: As the most liquid market globally, the US stock market ensures that investors can trade shares with ease and minimal risk of market manipulation. The high liquidity means tighter spreads and the ability to quickly find buyers or sellers, providing a seamless trading experience.
3. Extensive Diversification: Investing in the US market goes beyond just stocks. It opens up avenues for diversifying your portfolio with U.S. government bonds, corporate bonds, options, and ETFs spanning various sectors and industries. Additionally, American Depositary Receipts (ADRs) offer exposure to non-U.S. companies, further broadening your investment horizon.
4. Market Transparency and Integrity: The US securities market is regulated by the U.S. Securities and Exchange Commission (SEC), which upholds stringent standards to protect against market manipulation and promote efficiency and transparency. This regulatory framework ensures that investors can trust the integrity of the market, fostering a secure investment environment.
5. Currency Stability: The U.S. dollar, recognized as the world’s dominant reserve currency, has shown remarkable stability over time. This stability helps mitigate the risks associated with fluctuating exchange rates, making it a safer haven for international investors.
6. Hub of Innovation: The US is a cradle of innovation, home to companies that are at the forefront of technological and industrial advancements. From Silicon Valley tech titans to biotech pioneers and beyond, investing in the US market means aligning with cutting-edge innovation and potential exponential growth.

Comparing US Stocks and Malaysia Stocks Performance

When comparing the returns of the US stock market to the Malaysian stock market, the differences in performance become quite evident. Over the past decade, the US stock market has consistently outperformed the Malaysian stock market, offering higher average annual returns and a more robust growth trajectory.

The US stock market, represented by indices like the S&P 500, has seen impressive returns. Over the past decade (as of June 2024), the S&P 500 has averaged an annual return of approximately 12%. This growth has been fueled by the strong performance of major companies in sectors such as technology, healthcare, and consumer goods. The market's depth and liquidity have also contributed to its resilience and ability to attract significant investment capital.

source: Yahoo Finance

In contrast, the FTSE Bursa Malaysia KLCI (Kuala Lumpur Composite Index) has experienced negative performance over the past decade (as of July 2024), averaging an annual return of approximately -1.46%. The KLCI has struggled to maintain upward momentum due to economic fluctuations, political uncertainties, and sector-specific issues, unlike the US market.

source: Yahoo Finance

Ways to Trade US Stocks in Malaysia

Malaysian investors have multiple options to trade US stocks, including local stock brokerages and international platforms. Each type of broker has its own advantages and disadvantages, including different fee structures, regulatory oversight, and the range of available investment products. 

Foreign Brokers Regulated by the Securities Commission Malaysia

Regulated foreign brokers provide the assurance of local oversight and compliance with Malaysian regulations. Here are some of the key options:

Foreign Brokers Not Licensed by Securities Commission Malaysia

Some of the biggest foreign brokers are not regulated by local regulatory authorities in Malaysia. This includes platforms like TD Ameritrade, eToro, and Tiger Brokers, which are listed on the Securities Commission Malaysia’s (SC) Investor Alert List. This list identifies unauthorized platforms and serves as a caution to investors. The SC advises against investing with any platforms that aren’t licensed or approved, warning that dealing with unlicensed or unauthorized entities can expose you to risks such as fraud or money laundering.

However, being on the Investor Alert List doesn’t necessarily mean a platform is fraudulent. Many of these platforms are regulated by reputable international authorities. For instance, TD Ameritrade Singapore is regulated by the Monetary Authority of Singapore, while its international counterpart is overseen by the US Securities and Exchange Commission (SEC). These regulations provide a level of security and trustworthiness, even if they are not recognized by the Malaysian regulatory body.

One downside of using non-regulated foreign brokerages is the lack of recourse through the SC in Malaysia in case of disputes. Investors need to be aware that any issues with these platforms would need to be resolved through the regulatory frameworks of the countries where these platforms are based.

Domestic Brokers That can Trade US Stocks

Many domestic Malaysian stockbrokers have connections to US stock brokers, acting as intermediaries to facilitate your trades. These brokers allow you to set up an international trading account, enabling you to invest in US stocks, providing the assurance of local regulation and a familiar banking environment.

However, you might face limitations on the types of investment vehicles you can use or the total number of trades you can execute, depending on the brokerage firm. Additionally, brokerage fees and currency conversion costs can make investing more expensive. It's crucial to be aware of all the associated costs before opening an account.

How Foreign Brokers Offer Zero-Commission Trading

If you've looked through the comparison table of foreign brokers, you might have noticed that some of them charge zero fees for trading. This might seem surprising, but there are several strategies these brokers use to generate revenue without charging commissions directly to the trader. Here are a few key methods:

• Payment for Order Flow: One of the most common ways brokers make money is through payment for order flow. When you place a trade, your broker may route your order to a market maker instead of executing it themselves. Market makers pay brokers for this order flow because it allows them to process more transactions. This practice is controversial but legal as long as brokers prioritize getting the best execution prices for their clients​.
• Interest on Uninvested Cash: Brokers often invest or lend out the uninvested cash sitting in your brokerage account. For example, they might loan your cash out through securities lending programs or invest it in interest-bearing accounts. The interest earned from these activities can be significant, especially considering the volume of uninvested cash brokers handle.
• Securities Lending: Brokers can also make money by lending out the securities held in your account to other investors, particularly those engaging in short selling. The fees and interest earned from these loans contribute to the broker’s revenue. This practice is distinct from margin lending, where brokers lend cash to clients for trading purposes and earn interest on those loans​.
• Data Sales and Premium Services: Some brokers collect and sell aggregated data about their clients' trading behaviors. Additionally, they may offer premium services such as advanced trading tools, real-time data, and research reports for a fee. These add-ons can be a significant source of income for brokers who offer zero-commission trading​.
• Sponsored Funds and ETFs: Larger brokers often create and sponsor their own mutual funds and exchange-traded funds (ETFs). These funds generate revenue through their expense ratios, which cover operating costs and contribute to the broker’s profits. For instance, Fidelity offers various mutual funds and ETFs, and the income generated from these products helps offset the costs of offering zero-commission trades​.

How to Fund Your International Brokerage Account

Funding an international brokerage account can be tricky, especially if your broker does not accept funding in Malaysian ringgit. However, there are several methods available to Malaysian investors:

1. Through a Local Broker

You can buy international stocks through local brokers such as Maybank or Public Bank. While this option provides the convenience of dealing with a local institution, it often comes with higher transaction fees, typically around US$25 per transaction. This method also offers the familiarity and security of local regulatory oversight.

2. Through Malaysian-Listed ETFs

Another option is to invest in Malaysian-listed ETFs that have exposure to international markets. These ETFs can be purchased through a local broker. Investing in ETFs can be cost-effective and offers diversification across various sectors and geographies. Examples include:

• TradePlus NYSE FANG+ Daily (2x) Leveraged Tracker: Provides exposure to US technology giants.
• MyETF Dow Jones U.S. Titans 50: Tracks the performance of 50 major US companies.

3. Through Malaysian-Listed Unit Trusts

Some unit trusts available in Malaysia invest in overseas assets. These can be purchased through fund management institutions like Public Mutual or through online platforms like FSMOne. Unit trusts pool money from multiple investors to invest in a diversified portfolio of international stocks, bonds, or other assets, offering a managed approach to investing globally.

4. Through Robo Advisors

Robo advisors are automated platforms that help you set up and manage an investment portfolio. Most robo advisors invest in globally diversified ETFs, making them an excellent choice for investors seeking a hands-off approach. One such example is StashAway that offers globally diversified portfolios tailored to your risk profile.