Preparing to invest in US equity markets
So finally you have decided to invest in the US markets and decided to buy a few stocks of a true-blue US company like IBM or Microsoft. It is a good idea because American share market will give you the much needed diversification of your risk. You directly get access to US stocks like Amazon, Apple, Facebook and the list can go on. The process of US stock market investment is not too complex as it just involves some basic steps and processes to be followed. But there is more to it.
Nowadays, a lot of stock broking companies are offering you the facility to buy these US stocks sitting right here in India. In the US, there is a US futures premarket and also the US normal market and you can participate in both to get a good feel of the American markets. The US stock market trading is an altogether different experience compared to domestic investing and it is worthwhile in the long run. Thanks to liberalized rules and regulations; apart from being able to invest in the Indian stock market, you can also invest in the US stock market.
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What you must consider before investing in US stocks
Investing in US stocks not only enables you to participate in global market cycles but also diversifies the holdings of your India portfolio. It is a natural risk diversifier. However, before you start investing in the US markets, there are things you must be familiar with and take into account as it can impact your global investment decisions.
- An interesting aspect about US investing is that you can own fractional shares. It is not like India where you can only own 1 share at the bare minimum. The concept of fractional ownership of shares in the US means that you can even hold 0.20 shares or 0.10 shares of stocks like Amazon, IBM, Facebook or Berkshire Hathaway. That is because many of the US stocks are very high priced and they would be impossible to buy at the current rupee conversion levels. The US SEC (Securities and Exchange Commission), which is the US equivalent of SEBI has permitted retail investors to invest in fractional shares. This allows even small investors to own shares in mega companies.
- Your investments in the US market would still be subject to forex risk. Your earnings would be in dollars and when there is conversion of dollars to rupees, there is a currency risk that you are subjected to. The US markets only accept investments and pay outs in US dollars, so the conversion risk is always there for you. Of course, one options is that when you are exposed to dollar inflows, you can hedge with equivalent position in the exchange traded currency derivatives market.
- Did you know that regular and routine investments in the US are governed by the RBI Liberalized Remittance Scheme (LRS). Under the LRS, Indian citizens resident in India can remit up to $250,000 per year out of India. This is the outer limit and includes remittance for all purposes included any foreign purchases, foreign education, international investments etc. That is roughly equivalent to Rs2.04 crore annually.
- Provide for taxes since any income earned from global investments are entirely taxable Also, there are different tax implications for US stocks even if you invest in Broadly there would be taxes on your dividends and also on your capital gains. As an Indian resident in India, the tax liability will only be vesting on the Indian government. However, the US government does deduct tax before paying out dividends. However, since India has a double taxation avoidance agreement (DTAA) with the US. Hence, when tax returns are filed in India, you can claim set-off credit for the tax already paid in the US, so you are not taxed twice.
- Just as you have brokerage and statutory charges in domestic broking, it exists for US broking accounts also. Most Indian brokers facilitating US investing are acting on behalf of some US broker. There are costs like regular account fees, AMC charges apart from costs like brokerage and bank charges. All this will add up to your break even cost.
The process of trading in the US is not too complicated and the flow is almost like trading in India. It may sound esoteric, but it is worth the trouble and the effort.