Before telling about how to invest in US stocks, let me give an introduction about the US stocks market. In India, the most popular stock markets are National Stock Exchange and Bombay Stock Exchange. Just like that, in US, the top stock exchanges are New York Stock Exchange and NASDAQ. Also like we have NSE’s NIFTY and BSE’s Sensex, in US there are 2 major indexes which are the S&P 500 and Dow Jones.
The Standard & Poor’s 500 Index is also known as the S&P 500 which includes top 500 companies in the U.S. Stocks. The Dow Jones Industrial Average (DJIA) is one of the oldest indexes in the world. This index comprises 30 stocks. Like NIFTY and Sensex, these two indexes give an indication of the movement of the US stock market.
Now let us get into the main point of discussion of this post.
Why You Should Invest In The U.S Market?
This is the most important reason why you should invest in not just the US market but in any other country in the world. When you are into an investment, it is common sense to diversify your investments into various asset classes. Under equity investment, you need to have different companies from different industries in your portfolio. Assuming that you have a portfolio diversified enough across many industries, what if all your investments are in Indian stocks and all of a sudden India has to face a major catastrophe? What if we face a major war? What if our country is attacked by an atom bomb? What if we face a major earthquake that no one has ever experienced in this world? What if due to some poor governance or fiscal policies our economy crashes? To say some example, you can read about the hyperinflation in countries like Zimbabwe and Venezuela where due to poor fiscal policies and decisions these countries went through hyperinflation.
Just to give one example, during the time of inflation in Zimbabwe, just to buy a piece of toilet paper (not a roll of toilet paper), one would have paid 417 Zimbabwean dollars. And to make transactions easier, the government was forced to print notes of 1 trillion. Now imagine what will happen if something like this happens in India? But as we know that the Indian economy is very strong and the bodies including RBI and the Indian government are very strong to handle any kind of unprecedented events. But it is always prudent to be pro-active and prepare ourselves for an adverse event that is beyond our imagination. Hence, it is not a bad idea to invest in the US, the most developed country in the world.
Invest in the largest companies in the world
If you look at this data you will understand that the largest countries in the world are concentrated mainly in the US. Out of the top 12 largest companies in the world, 9 are from the US. When you decide not to diversify your investment beyond India, you are actually missing these giant companies. More than that, the scalability of these companies is so huge that the future return you can expect from these companies is not at all comparable with the companies that are just focused on India alone. Companies like Alphabet (Google), Microsoft, Apple, Amazon, Facebook, Visa, etc are spread out all around the world. When you invest in these companies, you are actually investing in the worldwide economy and not just in India. How does that feel…. ha :)?
When you invest in Indian stocks, your investment value appreciation happens only when the share price goes up. Right? But when you invest in US stocks with Indian Rupees, not only your value appreciates as the share price increase,e and along with that when the value of US dollar currency appreciation happens, you will get extra returns.
Credit for the above data goes to link.
Just look at the above image, on 3rd May 2021 value of 1 USD = 74.24 Indian Rupees. If you go back to 5th Dec 2003, the value of 1 USD was only 45.45 Indian Rupees. That is a growth of 3% CAGR just in terms of currency appreciation. That means, even if your invested company’s share value stays stagnant for the last 17 years, you would have achieved a 3% CAGR from your investment only because of currency appreciation. In other terms, whatever investment return you get due to the growth of share value, you would have achieved an additional 3% return just because of currency appreciation.
Now let us look at the benefits of currency appreciation with an example. Above is the share price chart of Amazon. If you have invested in one share of Amazon on 14th Dec. 2007 the share price would have grown from 89.08 USD to 3467 on 30th April 2021. This means in USD your investments would have grown at a CAGR of 31% for 13 years.
On 14th Dec. 2007 value of 1 USD was Rs. 39.25 which on 30th April 2021 was Rs. 74.19. Converting the investments from USD to INR, on 14th Dec. 2007 @ Rs. 39.25 per USD, the cost of one share of Amazon was Rs. 3493 (89.98 USD XRs. 39.25). On 30th April 2021, your investment value in Amazon would have grown to Rs. 257216. This means your investments would have grown at a CAGR of 37.5% for 13 years. You get an extra 6.5% return just because of USD currency appreciation. How does that feel…. ha :)?
Now I assume that you are really convinced with the idea of investing in US. So the next step is to identify the best companies in US and you decided to invest in the top-performing companies like Berkshire Hathaway and Alphabet inc. (Google). You did your fundamental analysis and you are ready to put your money into these 2 companies. You looked at the price of these shares and got shocked. Why? The share price of Berkshire Hathaway and Alphabet is 412500 USD and 2353 USD respectively. Which when calculated in INR will come around for Rs. 3 Crores for Berkshire Hathaway and Rs. 1.75 Lakhs for Alphabet. Affordable? No, right? The problem is as we are earning in INR and we need to do our investment in USD when converting our investments to USD it becomes a big number.
Here comes the value of fractional ownership, understanding the difficulty of a layman to invest in US shares, and considering it as a business opportunity many companies now are giving us the facility of fractional ownership of US stocks. This means, instead of buying one share completely, we can buy the fraction or a small piece of one single share which will bring down our purchasing price and will make it more affordable. So when the company value goes up, the value of the fraction of a share that we own also will go up. Interesting… right? You cannot do this to buy shares in the Indian market but you can buy shares of the US market from India. So, even if you have Rs. 1000, you can buy a fraction of one share of these prestigious companies.
How to invest in US stocks?
ICICI Direct in association with Saxo bank has given us the possibility of investing in the foreign market. Saxo bank is a fully EU-regulated Danish investment bank regulated Danish investment bank founded in 1992. This association now provides all Resident Indian Investors access to the worldwide Equity Market, ETFs, and Bond Markets. Through ICICI direct we can invest in equities across 36 stock exchanges across the 24 countries.
Cost of investing in US stocks
Brokerage cost: If you are planning to invest in US stocks directly, then you should be ready to pay different costs. The minimum cost of transaction can range from $5 to $15. The maximum cost per transaction can go up to $50. It all depends upon the country in which you are planning to invest.
Exchange rate cost: 1% to 2% on currency conversion both while buying and selling.
How much you can invest directly in foreign stocks?
As per RBIs Liberalize Remittance Scheme, you can invest a maximum of $2.5 Lakhs in a year.
If you are investing from India in US equity market, for all your investment gains, you have to pay tax for 2 reasons.
Tax on capital gains: The first one is tax you should pay on your capital gains. Now, what is meant by capital gains? It is the profit you receive when you sell the shares you bought. For example, if you have bought 10 Amazon shares at $100 per share and sell it at $300 per share, your total buy price is $1000 and the total sell price is $3000. In this situation, your total capital gain will be $2000. On this $2000 capital gain you are supposed to pay tax. For capital gain you will pay tax in India. You don’t need to pay tax in US. Now how much tax you should pay on your capital gain ie $2000 depends on one factor. How much tax you should pay on your capital gain in India depends upon your holding period.
The holding period is of 2 types. Long term and Short term. If you buy a share and sell it anytime after the completion of 24 months, it is called a long-term investment, and the gains you received are called long-term capital gain. Any investment sold before completion of 24 months is called a short-term investment and any gain you received from short-term investment is called a short-term capital gain.
The tax rate is different for long-term capital gain and short-term capital gain. Long-term capital gains are taxed at a rate of 20%. Please note that along with the 20% capital gain tax you should pay applicable surcharges and cess fees which will be a small amount. All your short-term capital gains are considered normal income in India and they are taxed according to your normal tax bracket as per your income level.
Tax on dividend: Dividends on your investments are taxed in US itself. Dividends in US are taxed at a fixed rate which is 25%. So the amount you receive in your bank account will be post-tax dividend.
If the company issues $100 against your investment as a dividend, 25% of that is deducted first and the remaining 75% is credited to your bank account. So from $100, $25 is deducted as dividend tax, and the remaining $75 is credited to your account. The amount you received as a post-tax dividend in your bank account is then considered as your taxable income like any other normal income.
Between India and US there is a Double Taxation Avoidance Agreement (DTAA). This helps the taxpayer to avoid paying tax on the same dividend at 2 locations. ie as per the above example you don’t need to pay tax on $100 dividend both in US and in India. As the dividend is credited in your bank account only after deducting 25% tax in US, you don’t have to pay extra tax on the dividend received in your account in India. This is possible because of the agreement between India and US which is DTAA. The dividend already paid in US will be available as Foreign Tax Credit which can be used to avoid the income tax you have to pay on the income you received from US as a dividend.
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