The US stock market is one of the largest stock exchanges in the world. It is home to some of the world’s leading companies that are a part of our day to day life like Amazon, Apple, Google, Facebook and more.
The US GDP is around 15% of the world’s GDP and the US stock market makes up for around 55% of the global market capitalization. It is home to the largest stock exchange in the world- The New York Stock Exchange.
Everyone looks to get a piece of some of the biggest companies listed on these exchanges. Furthermore, with changing technology and innovation there are new and promising companies originating in the US market that might change the face of the world with their next-gen products.
The US stock market helps one to invest in not only the best American companies but also in some of the giants from all over the world, thus providing an opportunity to diversify their portfolio globally. It offers an extensive array of options that range from technology to agriculture which an investor can choose from.
While careful investment in the US stock market can ensure high returns and gives you an opportunity to generate wealth, there is also a huge factor of risk involved that needs to be taken into account. A small change in the US economy, a change in the results of an election or new rocket launched in some other part of the world might have a big impact on the market.
These are a few risks you need to know about before investing in the US stock markets.
Currency Fluctuation Risk
Indian rupee has been considerably weak against the US dollar in the past years. These fluctuations affect the Indian investors massively. There are numerous factors affecting these fluctuations that are unpredictable. The rupee amount you invest in the US market will be converted to dollars before purchasing a stock option.
The current price of one US dollar against one Rupee is 74.20. Let’s suppose USD 1 = INR 74 and when you had purchased one share of Facebook at around USD 330, it would have been INR 24420. After a few months the price of Facebook shares goes up to USD 370 and you decide to sell your share. You will surely make a profit of USD 40 in the market.
However, if the price of one US dollar against one Rupee on that particular day has gone down to 60 then the sale amount translated to INR is 22200. This is excluding the taxes and other charges that will be levied on your income.
There is no predicting the change in these exchange rates and an Indian investor should be vary of the currency risks that they are exposed to.
Economic and Country Specific Risk
An investor is exposed to the risk of changing politics, economics and tax laws. An election, change in presidency or even a new law passed by the government will have an impact on the markets.
Events such as the 9/11 attacks showed the impact such events can have on the market even when the market was closed for more than a week anticipating the chaos of panic selling.
Once the markets opened after the attacks, Dow Jones fell 684 points, a 7.1% decline, which at that time was the biggest loss in the exchanges history.
The end of that week witnessed the biggest losses seen with Dow Jones – down 14% more, the S&P Index lost 11.6%, while NASDAQ lost 16% making it $1.4 trillion loss in value in just 5 days.
In the ever changing world, it is impossible to predict the events of the next day. Investors should be mindful of such scenarios while investing in such big stock exchanges.
Interest Rate Risks
The US is a debt-heavy economy and the policies allow small and big companies to take loans easily for new rounds of funding. Historically, rising interest rates have always had a negative impact on the stock prices and high interest rates can cripple a company which will in turn impact your investment.
Investing in any foriegn stock market will make you forego the benefits that you enjoy by investing in your own country’s stock market. Any change or increase in taxes in the particular sector that you have invested will have an adverse affect on your income.
As an Indian investor, you are liable to pay the standard 25% tax on any sale or purchase of stocks in the US markets. Additionally any income from the US stock market is also liable to capital gains tax in India.
The US Government has different tax regulations when it comes to stock markets. Various sectors of the US economy are regulated by different Government bodies. Any regulatory changes might impact the sector that you have invested in, causing the share prices to rise or fall. Indian investors should be aware of such regulations and must keep themselves abreast of the changes.
The global affinity of the US markets makes them vulnerable to the various issues that take place around the world. The decisions taken by leaders of different countries impact the markets on a large scale. This is true to all the other countries in the world too. However, given the global and geographical diversification in the US stock market which is host to companies from all around the world, it will be affected the most.
Investing in the US stock market has certain benefits such as diversifying your portfolio, rising value of the dollar, market capitalization, better liquidity etc. It also helps in spreading risk and diminishing it. But, it is important to keep in mind the basic formula of higher return = higher risk. The risks of such markets are difficult to zero-in on if you are a new investor.
Indian investors should be more careful when investing in US stocks owing to the multiple risk factors attached to it. Investors should also keep themselves updated on the economic, social and political changes that affect their investments.
Investing via a secure network and a professional brokerage might help to mitigate risk as they can help you understand the right stocks to invest in and the risks involved.