The way one invests saves and spends has gone through a lot of changes post 2020 when the pandemic struck the world. Investors nowadays are more concerned with the preservation of capital and minimizing risks, therefore they are not afraid to go global.
It is a fact that diversification can assist investors in reducing risk whereby the investors allocate a portion of their portfolio to global markets – which is expected to rise in the near future, as per investment experts.
Like the National stock exchange (NSE) and Bombay stock exchange (BSE) in India, stocks in the United States of America are traded on NASDAQ and New York Stock Exchange (NYSE). Indices (a measure of the performance of the stock market) like NASDAQ Composite, Dow Jones, and S&P 500 are used for US stocks.
Stocks in the United States are classified into four types based on their market capitalization, or market cap threshold, they are listed as below:
- Mega Cap: are the largest companies having a market capitalization of more than $200 billion.
- Large Cap: having a market capitalization of more than $10 billion these companies are long-standing corporations with consistent revenues and profits. Best suited for investors who are wary of taking risks.
- Mid Cap: These companies have a high potential for revenue and profit growth with a market capitalization ranging between $2 – $10 billion. Midcap stocks suit investors with moderate risk tolerance.
- Small-Cap: The market capitalization ranges between $300 million and $2 billion. These companies have high growth potential but have greater risk attached to them. They are therefore best suited for investors who have the ability to take huge risks.
Investing in US markets is now quite simple and possible for all, even sitting in India. This can be done in form of:
- Direct investment – like buying US stocks and Exchange Traded Funds (ETFs) through international brokerage firms.
- Indirect investments – like investing in mutual funds. There are numerous funds available that cover various industries and asset classes.
In order to initiate the process of trading in the US stocks, first and the foremost thing an investor needs to do is to contact an International brokerage firm. It is also a mandate that the international brokerage firm abides by the foreign exchange rules of the Reserve Bank Of India (RBI). It is the responsibility of the international brokerage firm to handle the entire paperwork for the investor.
- Opening an account – this can be done online by filling up some basic information like name, place, contact number etc, once the international brokerage firm is selected by the investor.
- Submission of documents of identity, address and bank are needed to be done next by the individual investor.
- Once the account is ready, the investor can start funding his account
- For trading in US stocks, dollars are needed. The investor needs to buy dollars from an authorized bank in the country. Under current regulations, an Indian individual can send up to $2.5 lakh (about 1.82 crores) in a financial year. All paperwork linked to the Liberalised Remittance Scheme (LRS) has to be completed.
- Exchange rates are quite important, in order to invest in US stocks. The brokerage firm can assist the investor in obtaining a low rate. If not, one can request a direct transfer of funds from the bank to the brokerage account.
Investing in US stocks has its own set of advantages and disadvantages. A single blunder can cost a lot of money to the investor therefore it is important to be mindful before starting to trade in US stocks from India. The investor can benefit by diversifying, currency (Dollar) appreciation, less volatility of US stock markets and gains made by the high-potential, innovative US companies on the other hand trading US stocks from India can have drawbacks like high expense ratios and sales charges, management abuses, tax inefficiency, and poor trede execution