Can Non-U.S. Residents and Non-Citizens Invest in IPOs and Mutual Funds Using an Online Broker?

The American equity markets remain highly attractive to foreign investors. Despite some high-profile share-price drops and a general sense that the American economy remains fragile, foreign money has been pouring into American hedge funds, investment banks and other money-changing institutions. While most of these funds have come from sovereign investment houses and fabulously wealthy private investors, many non-American retail investors have discovered the potential for superior returns in North America. While it's extremely difficult to predict the future of a volatile institution like the stock market, it appears likely that foreign investors will continue to support U.S.-listed companies in the absence of a fundamental shift in the global economy.

In many aspects of finance, the odds seem stacked against small investors. This is especially true with regards to so-called IPO access. Initial public offerings provide investors with unparalleled opportunities to earn nearly instantaneous returns on targeted investments.

When a company chooses to go public, it announces the date, time and price at which its stock will begin trading on an exchange. To increase interest in the offering, many companies set their stocks' IPO prices below market value. Investors who purchase IPO stocks at these low levels can often "ride" a wave of investor enthusiasm and capture outsize returns on their initial investments. Many savvy investors cash out of their IPO purchases during the course of the trading day on which the offering occurs. These folks often walk away after earning a 30 to 50 percent return on their money.

Unfortunately, such returns may only be available to institutional investors who enjoy prioritized access to the brokers that administer most IPOs. Many smaller retail investors are forced to wait until these initial buyers fill their orders and must purchase the IPO stock at far higher levels. International investors who may not be active during the North American trading day are likely to be unable to purchase American IPO stocks at below-market prices.

International investors may have more luck with U.S.-based mutual funds. While most Americans choose to place their mutual fund holdings in tax-protected retirement accounts, this option isn't available to non-citizen investors. However, non-citizens may purchase mutual funds directly through fund issuers like Vanguard and Franklin Templeton. By circumventing an online broker, these investors may actual reduce the average cost of their fund holdings and increase their long-run returns. However, international investors must be careful to purchase funds that permit international investment. Some American mutual funds restrict ownership to U.S. citizen investors.

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