Things To Keep In Mind When You’re Investing In The Stock Market: US Stock

Due to the nature of the world economy and the underlying conditions after the pandemic, it is worthwhile to invest outside India. Despite having a hybrid investment portfolio, as a pure-play investor in the Indian stock markets, your portfolio is vulnerable to local macroeconomic and geopolitical risks. No event can lower an investor’s portfolio value faster than a house of cards.
To become a successful investor, you must understand the stock market.

What are Stocks?

Stocks are securities that represent ownership of a fraction of a corporation. The stock owner is entitled to a percentage of the corporation’s assets and profits. According to how much stock they own. Stocks are called “shares”.

It is most common to buy and sell stocks on stock exchanges, although private sales can also occur. Stocks are the mainstay of many individual investors’ portfolios.

Government regulations protect investors from fraudulent practices by requiring these transactions to comply with government regulations. In the long run, they have outperformed most other investments. Most online brokers offer these investments.

What is a Stock Market?

The stock market refers to a collection of exchanges and other venues where shares of publicly listed firms can be bought, sold, and issued. Such financial transactions are carried out on established formal exchanges (physical or electronic) or over-the-counter (OTC) markets that are governed by a set of rules.

Although the phrases “stock market” and “stock exchange” are frequently interchanged, the latter refers to a subset of the former. When someone trades in the stock market, they are buying or selling stocks on one (or more) of the stock exchanges that make up the entire stock market. 

One of the most important aspects of a free-market economy is the stock market. It enables businesses to raise funds by issuing stock and corporate bonds. It allows ordinary investors to share in a company’s financial success, profit from capital gains, and receive money from dividends—though losses are also possible.

A country’s or region’s stock market may be made up of one or many exchanges. The New York Stock Exchange (NYSE) and the Nasdaq are the two most important stock exchanges in the United States.

Participants in the Stock Market

The stock market attracts a diverse range of players, including long-term investors and short-term traders. Each has a distinct job to play, yet many of the roles are interconnected and dependent on one another to keep the market functioning effectively.

1. Stockbrokers are certified professionals that buy and sell shares on behalf of investors. In the United States, they are known as registered representatives.
2. Portfolio managers are individuals who manage client portfolios or groupings of securities. Analysts provide suggestions to these managers, and they decide whether to buy or sell the portfolio.
3. Investment bankers represent corporations in a variety of capacities, including private companies seeking to go public through an initial public offering (IPO) or companies undergoing mergers and acquisitions.
4. Custodians and depot service providers are businesses that store customers’ assets for safekeeping in order to reduce the risk of theft or loss.
5. Market makers are broker-dealers who help people trade stocks by posting bid and ask prices and keeping a stock inventory.
6. Individual stocks or bigger indexes are used by speculators to make market directional bets. Speculators can acquire shares to build a long position or sell them to build a short position.
7. Arbitrageurs are traders that seek out market mispricing in exchange for low-risk rewards. As a result, the market remains more efficient. This type of arbitrage is frequently used by algorithmic and high-frequency trading (HFT) algorithms.

Stock exchanges are profit-making businesses that charge a fee for their services. The money from transaction fees charged for each trade executed on their platform is the primary source of income for these stock exchanges.

How does the Stock market work?

Stock markets provide a safe and regulated environment where market participants can confidently trade shares and other suitable financial instruments with little to no risk of losing money. The stock markets operate as primary and secondary markets, according to the guidelines set forth by the regulator.

The stock market allows corporations to issue and sell shares to the general public for the first time through an Initial Public Offering (IPO). This action aids businesses in obtaining the funding they require from investors. It essentially means that a company divides itself into several shares (for example, 20 million shares) and sells a portion of those shares to the public at a price (for example, $10 per share).

A firm will require a marketplace where these shares can be sold to make this process easier. The stock market provides this marketplace. If all goes according to plan, the corporation will be able to sell 5 million shares at a $10 per share price and make a profit of $50 million. Investors will receive company shares, which they can expect to hold for the term of their choice, in the hopes of a rise in share price and potential dividend payments.

The stock exchange operates as a facilitator for this capital-raising process, receiving a fee from the company and its financial partners in exchange for its services.

Where and how much you should invest in US Stocks?

When it comes to diversifying your portfolio across geographies, the US stock market is one of the best options. The country is home to some of the top technological and wealth-creating firms in the world, making it a terrific place to invest. Furthermore, the low correlation between Indian and US equity markets makes it a favourable investment.

Few things you must consider before investing in the US stock market.

Liberalized Remittance Scheme

It is a scheme that allows people to send money from one country to another.

• The RBI’s Liberalized Remittance Scheme, or LRS, allows you to invest in the US stock market. Every Indian resident can send up to $250,000 per year under the plan. This maximum applies to all individuals, including minors, therefore a family of four can send up to USD 1 million per fiscal year.
• Any investments, such as US securities, real estate, and bank deposits, including all abroad expenses, such as foreign travel and student education, are included in this quota.

Diversification in terms of geography

• Your portfolio will be more stable if you diversify geographically. Markets in industrialised countries are less volatile in the long run than markets in emerging countries. You may join in the global growth narrative by investing in the stock market of the United States.
• If you invest in Alibaba, China’s largest retailer, for example, you are now a part of China’s economic growth. You can acquire exposure to broader economies through ETFs traded on the US market. For example, the NYSE-listed EWG ETF invested in some of Germany’s major corporations.
• You can also invest in new themes on the US stock market, which is currently inaccessible in India. There are no big chip or electric vehicle manufacturers in India where you can invest. You might, buy-in Nvidia or Tesla and include the corresponding themes in your portfolio.

Foreign Exchange Impacts

• The fluctuation in the exchange rate is an important element to consider while investing in the US market. In recent years, the Rupee has lost 3 to 5% of its value versus the US dollar on average.
• When you invest in US markets, you’re also investing in the US Dollar, and you’re taking on the risk that comes with it. When the value of the US dollar rises, so does the value of your portfolio, and vice versa.
• Your Indian bank may charge you an FX conversion fee or spread when you send money to invest in the United States. Depending on the bank, this can range from 0.5-2 per cent of the total amount sent.

Taxation

To make your efforts worthwhile, you must examine the tax implications of your international assets. A Double Tax Avoidance Agreement (DTAA) exists between India and the United States, which prohibits the same income from being taxed twice.

US stock market investments are subject to two types of taxes:

• Dividend Tax: Dividends from US stocks are taxed at a flat rate of 30% for overseas investors. However, due to a tax treaty between the United States and India, Indian residents pay a 25% tax rate (deducted before distribution). Due to the Double Tax Avoidance Agreement between the US and India, the tax paid in the US can be claimed as a Foreign Tax Credit in your domestic filing.
• Capital Gains Tax: In the United States, there is no capital gains tax on your investments. In India, however, you must pay tax on your international capital gains.

This falls under two broad categories:

1. Long-term capital gain (LTCG): If you keep equities for more than 24 months before collecting capital gains, you will be taxed at a rate of 20% plus any applicable fees, with indexation benefits.

2. Short-term capital gain (STCG): Profits from assets held for less than 24 months are included in your ordinary taxable income and are subject to standard income-tax rules.

You should also think about TCS (Tax Credited at Source), which was recently established. All international remittances above INR 7L in a fiscal year will be subject to a 5% TCS under the new guidelines. This upfront tax can be claimed as a deduction on your annual tax return and is not considered an out-of-pocket payment.

 Life Goals

• Your financial strategy should include life goals. Your assets should be able to assist you in achieving your ambitions of studying or moving abroad.
• For example, if you aim to save up to $50,000 for your child’s international education, your investment portfolio should reflect that. This may need to be kept separate from your diversification objectives, such as exposure to commodities or gold ETFs.

Conclusion

Due to these advantages, investing in the US market makes sense. However, there is also a note of caution. The pandemic acts as a great leveller, and the latest fear with the Omicron variety terrified markets all around the world, even in the United States. Large firms, on the other hand, have significantly higher resistance to such challenges and, on average, bounce back faster.

Furthermore, by investing in US markets, Indian investors benefit from the rupee’s fall against the dollar, making investments significantly more appealing. In the last ten years, the rupee has lost 44% of its value against the dollar. It’s also important to remember that there are a variety of charges connected with investing in US equities, which we may not be familiar with.

These costs could include remittance fees when sending money to and from the United States, broker withdrawal fees, US taxes, and other compliance expenditures.