5 Things to Consider Before Buying US Stocks (2024)

Nowadays, a lot of stock broking firms have come up with ways to invest in the stock markets of other countries through their online trading app. This includes the stock market of the United States of America. Yes, you read that right. Apart from being able to invest in the Indian stock market, you can also invest in the US stock market.

You also get to bring about some much needed diversification to your investment portfolio and get the chance to create wealth. If you’re someone who is interested in investing your money in the US stock market, then this article is for you. Here are 5 important things that you should be aware of before you go ahead with your investments.

1. The concept of fractional ownership of shares

In the Indian stock market scenario, the smallest unit of a company that you can invest in is 1 share. However, this is not the case with the US stock market. The share price of many large US companies are in the hundreds and thousands of dollars. Due to this, retail investors may not be able to invest in US stocks.

Therefore, to ensure that retail investors are capable of investing in US companies, the Securities and Exchange Commission (SEC), which is the watchdog of the US stock market, brought in the concept of fractional ownership of shares.

Thanks to this, retail investors can invest in a company by purchasing less than one share through the fractional share concept. For instance, let’s say that you wish to purchase the stock of Apple Inc.

The current price of 1 share of Apple Inc. is around $150, which is quite high. So, what do you do? Thanks to fractional ownership, you can choose to purchase a fraction, say 50%, of a share of Apple Inc. by paying just $75. By doing so, you will end up owning half a share of the company.

2. The impact of foreign exchange

Just like how you can invest in the Indian stock market only in terms of the Indian Rupee, you can invest in US stocks only in terms of the US Dollar. So, the first thing that you would need to do before you invest in stocks of the US is convert Indian Rupees to US Dollars.

The foreign exchange rate of the USD-INR currency pair tends to fluctuate on a daily basis. So, this is something that you would need to account for when transferring funds from an Indian bank account to a bank account in the US.

Also, banks tend to levy fees, also known as foreign currency markup, for converting Indian Rupees to US Dollars. Therefore, this is again something that you should consider and plan for when transferring funds.

3. The maximum amount of investment in a year

The Reserve Bank of India (RBI) enacted the Liberal Remittance Scheme (LRS), which specifies the maximum amount of investment or transfer that an Indian citizen can make outside India in a year.

And according to the LRS, the limit for an individual is set at $250,000 per year, beyond which an Indian citizen will not be permitted to remit any more money to places outside the country without the express approval of the authority. This limit of $250,000 per year is applicable for investments in US securities, bank deposits, real estate, foreign travel expenses, and education expenses.

So, if you’re planning to invest in US stocks, it is a good idea to ensure that the investment in a financial year doesn’t exceed $250,000.

4. The impact of taxation

The income and profits that you receive from your US stock investments have several tax implications. And as a prospective investor in the US market, it is crucial that you know what they are. There are two kinds of taxes that might be levied - tax on dividends and tax on capital gains.

Now, since you would be a resident Indian citizen, your income will be eligible for taxation in India. And since you would be effectively investing in the US stock market, you will also be taxed by the US government. So, does that mean that you would have to pay tax twice on the same income?

Thankfully, that’s not the case. Both India and the USA have a treaty known as the Double Taxation Avoidance Agreement (DTAA). According to this treaty, a resident Indian citizen with income from the US need not pay tax twice. Instead, they will only have to pay tax in India.

5. The charges associated with a US stock broking account

Now, you cannot invest in the US stock market with an Indian stock broking account. Instead, you would have to open one with a US stock broking entity. Most Indian stock brokers that allow you to invest in US stocks usually tend to partner with a US stock broker to offer this service.

And as with an Indian trading account, you will have to bear certain charges and fees for a US stock broking account as well. These charges include Annual Maintenance Charges, brokerage charges, bank charges, transaction charges, and more.

Therefore, this is something that you should also account for before you go ahead and invest in US stocks since these charges have the potential to lower your profits.

Conclusion

Now that you’ve seen the things that you should keep in mind before investing in the US stock market, go ahead and give it a try. If you’re looking out for a stock broker who can help you invest in US stocks, get in touch with Motilal Oswal right away.

The online trading platform of Motilal Oswal allows you to dip your toes in the US stock market. However, to gain access to this facility you would have to first open a demat account and a trading account. Thankfully, you can open one within just a few minutes through an entirely paperless process.

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