5 things you should know before investing in the US stock market

8 August 2022
6 mins read
5 things you should know before investing in the US stock market

The US stock market remains one of the top choices for Indian investors. The US stock exchanges are the homes of some global technology leaders and multinational businesses, creating great investing opportunities. Moreover, the low correlation between the Indian and the US equity market makes it an exciting proposition for investors. If it has piqued your interest, this article is for you.

However, since investing in a foreign market is comparatively new, it makes sense to know the market, its functionalities, regulations, and overall set-up before deciding to invest. Here are the five things that every investor should know before investing in US stocks.

  • Regulatory framework: Most Indian investors prefer investing in the US market because it is one of the most developed, flexible, liquid, and transparent financial markets, besides being one of the oldest. Some of the biggest companies by market capitalisation are listed on the US stock exchanges. The Securities and Exchange Board (SEC) was formed in 1934. It oversees market action and ensures strict enforcement of laws and regulations to maintain the highest standards of transparency.
  • Forex rates: Indian investors need to consider the fluctuating exchange rate of the two currencies while investing in US stocks. Any gain (loss) of an Indian investor is subject to the conversion rate. The cost of investment and returns move in tandem with the dollar value against rupees.

The dollar exchange rate is another reason for the Indian investors to prefer the US stocks. If the dollar appreciates, the value of your investment will also increase, even when your portfolio remains unchanged. However, it increases your exposure to foreign currency volatility. Besides, Indian banks charge a fee of 0.5 to 2.0% depending on the bank, for facilitating currency exchange. The best way to reduce recurrent transaction costs is to save lump sums and transfers.

  • Taxes: Investing in US stocks can be daunting if you are not aware of the tax agreements between the two countries. India has entered into Double Taxation Avoidance Agreement (DAT) with eighty-eight countries, including the USA. It prevents the authorities from taxing a single income twice. Hence, if you receive income from the USA with tax deducted at the source, you don’t have to pay tax in India.

Like investments in India, US stock investment is also categorised for long-term and short-term capital gains. Investing in US stocks for more than twenty-four months is categorised as LTCG. Conversely, when stocks are sold before the threshold of 24 months, it is considered STCG.

Read more: Taxation while investing in us stocks

Long-term capital gains will be taxed in India with no tax implication in the USA at a rate of 20%. For short-term gains (for stocks held for less than 24 months), the amount received will be taxed according to the tax slab declared by the IT Department.

If you receive a dividend from US companies in a particular financial year, a flat tax of 25% will apply.

  • Charges: Various charges are involved in investing in the US share market, impacting the total investment cost.

Since investing in the US market requires a currency conversion, it involves certain charges, which could be a percentage or a fixed dollar amount, depending on the client agreement.

As the first step of account set-up, the client must transfer or remit a specific amount to the foreign brokerage to ‘fund’ the account. Additionally, there will be charges associated with currency transfer at this stage.

Once you have paid the initial charges, additional account maintenance fees need payment along with charges related to frequent transactions and frequent fund transfers.

Reading the fine prints in the client agreement document is the best way to avoid additional charges.

  • Fund limit: RBI has fixed an upper limit for the Indian investors to invest in the US market in a particular year. In a year, Indians can invest a maximum amount of USD 250000 under the Reserve Bank of India’s Liberalised Remittance Scheme, including any amount remitted for education, travel, purchases or any other overseas transaction. Indian investors need to remit the fund to the broker to set up the account before making an actual investment and submit the A-2 form with RBI’s authorised brokers.

 

Where can you invest in the US market?

Most Indian investors prefer the US market when exploring the global market. There are multiple ways Indian investors can explore the US market. With fractional shares, it is no longer required to invest a huge sum of money to buy a share of Amazon, Microsoft, Google, Zoom or Netflix.

Direct stock investment: Indian investors can directly buy stocks of US companies in the US market. Investing in US stocks adds the much-required stability to your portfolio while allowing you to diversify across the markets. You can open a trading account with Indian brokers, such as Angel One, that facilitates international investment.

Mutual funds: Indian investors can gain exposure to the foreign market by investing in mutual funds trading on international exchanges. It is perhaps the easiest way to diversify your portfolio with foreign stocks. However, it doesn’t come without risks. The country’s market fluctuation or sector volatility can significantly impact your returns.

ETFs: Investing in direct stocks requires a certain degree of expertise and market knowledge. So, another way to gain exposure in the international market is by investing in mutual funds and Exchange Traded Funds in which you can get benefits like instant diversification, liquidity, and risk moderation. US ETF funds allow investors to invest in multiple US stocks at one go.

Theme-based and sector-specific ETF funds are also available to Indian investors, allowing them to invest in targeted sectors like healthcare or themes like energy, cloud computing, or electric vehicles.

Conclusion

The Indian market is going through a phase of high volatility. It is the right time to rethink your investment approach if you are an investor.

Diversification is an important aspect of portfolio construction. Investors can spread risk and improve balanced returns by investing across geographic and economies. Angel One allows its clients to buy US stocks from India to amplify their profit. You can give your portfolio foreign exposure by investing in global companies like Amazon, Apple, Microsoft, Google, Zoom etc. Open an international trading account with us and start investing in foreign companies.

Disclaimer: “This blog is exclusively for educational purposes and does not provide any advice/tips on Investment or recommend buying and selling any stock”