Justin is an active trader with more than 20-years of industry experience. He has worked at big banks and hedge funds including Citigroup, D. E. Shaw and Millennium Capital Management.
US stocks have for many years generated substantial gains for investors, and they continue to attract a lot of attention from investors around the world. Indian investors in particular can benefit from tapping into the US stock market and taking advantage of the ways that US stocks are different from Indian ones.
With more and more Indian investors getting involved in US investments that complement their existing portfolios, it’s little surprise that brokers have set up platforms to suit every kind of trader. Whether you choose a domestic or offshore broker, the process of setting up an account and getting into the markets is straightforward. This review will outline why investing in US stocks from India could be a good idea and how to go about it.
From a practical point of view, the first note to share is that online brokers have revolutionised the investment industry, so you don’t have to be a US citizen to tap into the potential gains. The five simple steps to follow are the same whether you are based in India or Indiana. It’s simply a case of establishing how to find the right stock for you and following some ground rules on how to safely put your ideas into practice.
The underlying principles of stock trading are the same in the US and India markets, but there are some differences between the two regions. Explaining those differences requires digging into some aspects of stock investment basics.
If you own stock in a company, you own part of that company. Some giant US firms such as Apple have market capitalisations of more than $1tn, so if you own one share (priced in the region of $150), you will own just a small percentage of the total value, but you will be a shareholder, nonetheless.
You will be entitled to a proportionately equal share of any profits generated by the company. Apple’s revenue for Q2 2021 (up to 27th March) saw a record $89.6bn gained.
One similarity between owning stocks in US and Indian companies is that you’ll also experience the same upward and downward share price moves as the company’s prospects improve or deteriorate. If the firm performs well, the stock price will go up, and if things go in the other direction, you will see the stock price go down.
Another way that the two markets are similar is in terms of governance standards. Firms in both countries that are listed on stock exchanges such as the Nasdaq, the New York Stock Exchange and the National Stock Exchange of India have to comply with the rules and regulations of the stock exchanges they trade on.
Despite the already outlined similarities, the characteristics of the underlying companies that are traded on the stock markets in the two countries are very different. In the same way that the US and India economies and cultural features are different, so are the investment opportunities.
US retail investors have historically been active in the stock market. This pioneering approach has resulted in US stock markets becoming huge in size. Whether you want to invest in a small growth stock or a blue-chip multinational, there is something for everyone. The Nasdaq 100, Dow Jones Industrial Average (DJIA) and S&P 500 indices are the benchmarks that other global stocks measure themselves against.
The depth of the US market goes even further than this, as best demonstrated by the Russell 2000 index, which contains 2,000 US stocks that are too small for the larger indices. They are still large in global terms and the weighted average market capitalisation of members of the Russell 2000 is still a sizeable $3bn. This means that investors aren’t necessarily buying into firms that are risky due to their small size but into names that are closely tied to the prospects of the US domestic economy.
The more share trading in a market, the better the conditions for users. Higher trading volumes mean greater trading liquidity, and this translates as tighter bid-offer spreads and lower brokerage fees. At the same time, the extra activity encourages more brokers to set up and compete with each other for market share. Improved liquidity also reduces the risk of getting caught in a position in a market where trading activity dries up.
Some of the biggest stock success stories in the world – the ones that made their early-days investors fortunes – started out as small US-based operations. Amazon famously was founded in Jeff Bezos’ garage but grew to have a market capitalisation of $1.7tn, and this kind of potential is put down to unique characteristics found in the US economy. In the US, small firms can experience rapid growth without having to consider cross-border trade. The huge domestic market acts as an incubator for firms until they are ready to expand into global markets. The Indian economy and population are also huge, but for now, at least, the US is home to more firms that might experience moon-shot-style growth.
The India stock market is associated with higher price volatility than that in the US. According to the World Bank, in 2009 it was highly likely that stocks on the Indian exchange would increase or decrease in value by 44% over the course of a year.
So far in 2021, the NIFTY 50 index has been the third most volatile of the major global stock indices.
Investing in lower volatility US stocks, such as those found in the DJIA and S&P 500, can be less of a roller-coaster ride than investing in Indian stocks. For inexperienced traders, this can help the trading bottom line as emotion is taken out of the situation, meaning that investors don’t panic and sell when markets monetarily tank.
There is also the fact that the Indian and US companies have different growth cycles. One might be booming while the other takes a lag. In the long run, the hope is that these bumps are evened out, but a portfolio is hedged to that outcome if it has positions in both. Investing in US stocks means that you can still benefit from broader global growth if there are local issues impacting the India economy that result in India stocks underperforming.
One interesting feature of US stock markets is that individual stocks tend to have high prices. The reasons for this are largely historical and cultural. However, if you wanted to buy one share of US stock market giant Berkshire Hathaway Inc. at the start of 2021, you would have needed to have $342,249 in cash to hand. In contrast, shares in ICICI Bank Ltd, which forms part of the NIFTY 50 index, trade near to ₹719.
To get around the problem of not everyone having $342,000 to invest, some brokers offer ‘fractional’ share trading in US markets. This allows investors to buy part of one share rather than the whole amount. If you want to spread your investment across several different US stock names and allocate a smaller amount of cash to each, then check that your broker offers ‘fractional’ trading.
The process of getting to grips with how the current value of a stock is calculated must factor in that different investors have different takes on which valuation model to use. This is best demonstrated by fluctuations in share prices that reflect those who think that a stock is undervalued, and those who think that it is overvalued, buying and selling according to their opinion.
A lot of the valuation models come back to the fact that stock investors are best seen as owners who are entitled to a share of the future income stream of a company. If expectations of future income are upgraded, it’s highly likely that the price of the stock you hold today will increase. There is more benefit in buying into the firm and becoming a part owner of it.
The US is the home of stock trading, and as a result, there are a lot of free-to-use research sites offering views and opinions on US stocks. Americans have for decades been one of the most active populations in terms of managing their own investments, which has resulted in a thriving industry where a lot of information is readily available. This is great news for investors, but on the other hand, there is a need to use some filters to fine-tune your selection.
One of the main tools used by stock pickers is fundamental analysis. This involves studying the ‘fundamentals’ of a firm’s business operations using publicly available information. As equities are, to a large extent, priced according to future revenue streams, two of the key metrics are ‘earnings per share’ and ‘price/earnings ratio’.
Predictions of future revenues involve a margin for error, but these metrics use the next best thing, which is the most recent historical earnings data. Most US firms provide quarterly updates on earnings performance so that investors can get an up-to-date idea of how they are performing. In the US, these reports are so important that the process even has its own name: earnings season.
Any changes in recent earnings performance can significantly impact the price of shares as investors consider whether the change will be long-lasting. An ‘earnings miss’ is taken to be a sign that future earnings might also need to be downgraded, and an ‘earnings beat’ is likely to be associated with a rise in a stock price.
If your target stock has a P/E ratio above the market average, then it’s a sign that it’s a growth stock. Buyers of these stocks are predicting that the company will outperform the market in the future. Some would look at that same stock and consider it ‘expensive’ as the stock price is not justified by current earnings.
Remember that some stock prices of some US firms are sky-high despite the firm never having made an actual profit. The demand for the stock is based on what might happen in the future. At the other end of the risk-return spectrum are those investors who target stocks with P/E ratios below the average in the belief that they will ultimately catch up with the broader market.
Those investors looking for a middle-of-the-road approach might consider buying US blue-chip, defensive and income stocks that have a higher-than-average dividend yield. Returns in those strategies rely heavily on the regular payments made to investors, rather than capital gains on the stock price itself. Given the size of the US economy and its established role as a global superpower, there are plenty of investors who buy these US stocks with the intention of securing long-term stable returns.
Studying past earnings to predict future ones is a popular approach. It does, however, involve looking in the rear-view mirror. As a result, a lot of investment decisions made using fundamental analysis still involve analysis of a company’s future prospects and studies of new projects coming through the pipeline.
All of this information is widely available. It can be gained by visiting a company’s website or using a good broker that will filter the masses of information and present it in a more user-friendly format.
Technical analysis uses historical price and chart data to try to predict future price moves. One of the key metrics used are moving averages with investors assuming that price will revert to mean in the long run. In this way, short-term dips are buying opportunities and price spikes are a chance to crystallise profits. This approach is so popular that there are strategies based on spotting and trading these price patterns in order to buy or sell.
Taking aircraft manufacturer Boeing as an example, the COVID-19 lockdowns and restrictions on international travel caused the stock price to nose-dive in April 2020. It moved a long way from the 100-day average price of the stock, but investors who bought that dip in the belief that in the long run the Boeing stock price would recover can be seen to have made the correct call.
When looking for trade entry and exit points, fundamental and technical analysis are often used in conjunction. A popular approach is to use fundamentals to identify target US stocks and technical analysis to help spot the best time to buy them. The principles of technical analysis can be used across other sectors, such as forex, commodities and crypto. Fundamental analysis is strongly associated with US stock markets due to firms there providing masses of fundamental data on a regular basis.
Investing in any stock positions can be a roller-coaster ride, but the US market is so diverse that it offers ways to manage the risks and emotions involved.
One of the top tips from experienced investors is to take the emotion out of trading, and tapping into the US stock market and building a diversified portfolio can help do that. That way, investors are able to stick with their strategy and avoid panic-selling a position that suffers a short-term price slide but will ultimately come good.
One of the first decisions to make involves assessing your investment aims and personal attitude to risk. If you’re looking to make long-term gains and are relatively risk averse, then blue-chips and dividend stocks might be your preference. Procter & Gamble, Microsoft and Ford are all US blue-chip stocks that have historically generated solid returns for investors. Those with a higher risk-return would look to invest in US growth stocks and small-caps such as semiconductor services firm ACM.
There are literally thousands of different stocks to choose from, with the firms they represent operating in every kind of sector of the economy. Focusing on US stocks opens the door to building a portfolio that could produce consistent if not breath-taking returns. There is always the option to include some smaller positions in high-risk-return stocks, but once again, there is also a wide selection of those.
One of the easiest ways to manage risk and enhance returns is to manage the amount of cash you invest. Those who are new to investing or entering a market for the first time are recommended to start small and build up positions gradually. This allows time to get used to profit and loss (P&L) swings and the peculiarities of a market. Plenty of trusted online brokers, such as those on this list of the best online brokers, don’t charge separate commissions on each trade, so adding to positions in small increments can still be cost-effective.
There are two different factors to consider when assessing your total return. The first is ‘capital gain’, which is the difference between the price at which you buy and sell your stock position. The second is ‘dividend income’, which for US stocks is typically paid quarterly.
Some stocks, particularly growth stocks, don’t pay dividends, so your total P&L will be determined by the price you enter and exit the position. The US market has plenty of stocks that operate this way as the management prefers to retain profits to invest in new, exciting projects. Market titan Amazon is one example. If you buy AMZN stock, your P&L will be determined solely by the entry and exit price of your position.
Strategies to invest in stocks such as tobacco giant Philip Morris should also factor in the dividend payments made by the firms held. In the case of Philip Morris, it has generated a consistent dividend yield for investors over a 10-year period.
Dividends can be reinvested in the position by buying more shares or taken as cash. If you opt for the latter option, your strategy’s total P&L will be a combination of capital gain and dividend profit.
There are a lot of brokers to choose from due to the boom in online trading attracting new entrants into the sector. Indian investors can choose to use a domestic or offshore broker that offers access to US markets. Or alternatively, open an account with an offshore broker. Guidelines laid out by the Reserve Bank of India in the Liberalised Remittance Scheme permit Indian residents to invest up to $250,000 per year without special permissions.
Onshore brokers that have relationships with US brokers can provide access to the US stock markets, but as they are acting as intermediaries, there is a risk that this route will incur extra costs. This can be a natural first step for those who already have an account with a domestic broker and favour convenience over market access and cost.
Setting up an account with an offshore broker cuts out the middleman. This can result in cost savings and a larger number of stocks being available due to the fact that these brokers specialise in providing clients with access to the global markets.
Whichever route you choose, it’s worth checking how a broker treats deposits made in Indian rupees. Minimising forex conversion costs results in improved investment returns. The good news for investors is that fierce competition between brokers has driven down charges such as currency conversion costs. Before you start running through the terms and conditions, it is important to make sure that your selected broker can be trusted. One way to do this is to ensure that your broker is regulated by one of the below Tier-1 regulatory authorities:
Another way to check your broker’s credentials is to find out how long it has been operating. Those that have been in the industry for decades have not only worked out what their clients want, but also have reputations that they will want to protect by providing a good service.
Making sure that your broker is trustworthy is the most important first step. If you haven’t traded US stocks before, then at this point, one of the best options is to try out a few different brokers by using a risk-free demo account. These take seconds to set up and are free to use. They have all the functionality of the live trading platform, so you can try out buying and selling US stocks using virtual funds. Not only do you get to establish the pros and cons of each broker, but you also get to develop your trading skills.
Upgrading to a live account and trading real cash involves providing some additional personal information and depositing funds at the broker. The onboarding process is completed online and helps ensure that you, and only you, have access to your account. Cash can be paid into accounts using a variety of payment methods that take a varying amount of time to process. Some take up to two days, whereas others are almost instant.
The broker platforms have functionality that has been specially designed to make trading easy. Most beginners can establish how things work by simply opening an account and surfing the features of the platform. It is recommended to start off using a demo account so that any errors don’t cost real money.
This can be done by filtering the stocks on offer down to those that are US-based. If you have a specific stock in mind, then try the broker’s search tool. The broker eToro, for example, allows clients to filter by exchange so that they can find all the 505 Nasdaq stocks it offers in one place.
Whether you want to buy AMZN, GM or JPM, the process of booking a trade is the same. Access the market, enter the amount you want to buy, and then click ‘buy’. There are some other tools available that can help you finesse your trade entry and manage risk.
An alternative approach to risk management is to not use stops but to trade in small size and diversify your portfolio. That way, if price suddenly dips and then recovers, you won’t get stopped out of what ultimately proved to be a winning strategy.
Trading in the US stock markets can be done using a handheld or desktop device, and after running final checks on your instruction, it’s just a case of clicking your mouse or tapping your screen on the ‘buy’ button.
If things go to plan, you should be able to take a hands-off approach to managing your US stock investments. Once you have carried out the necessary research, selected a good broker, and practiced using a demo account, it’s largely a case of monitoring news events relating to your positions.
Before you move to that stage, it is crucial to double-check your trade. It is possible to make ‘fat-finger’ errors such as inputting the wrong amount, or even clicking ‘sell’ instead of ‘buy’. Fixing these immediately, before the price moves too far is essential to protecting your returns. To do this, access the portfolio section of the platform where all your positions and the P&L they are generating will be displayed.
US stock markets have a proven track record of generating sometimes incredible returns for investors. Those returns can’t be guaranteed, but those who choose to buy US stocks from India do have a chance of replicating those returns and also benefit in other ways.
Investing in different geographical locations, sectors and types of firms is all part of diversifying your portfolio. If you’re going to follow that core principle of investing, then there are much worse markets than the US to buy into. It is the world’s leading economic superpower, and investors can choose from US firms that are global players with instantly recognisable brands or ‘tech stocks’ of the future.
Following the basics in terms of how to invest safely means that you will be in a good position to be involved in some of the fantastic buying opportunities to be found in the US market right now.
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