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Risks in the US Stock

23 Jan 2023

If you have taken a moment to consider how many “phoren” products we use on a daily basis, the number may be mind-boggling. We use several products from China and the USA, some of which we cannot do without. From gadgets to other regular items such as soap, food products, etc, American items and services tend to occupy a pivotal place in many lives. This may prompt you to invest in US stock at some point or another, and with the Indian government making it easy for you to do this (upto a limit), you may be tempted to earn gains. 

With literally thousands of commodities being used all over the world, the US is home to some huge corporations, and has the distinction of being the country with some of the most important ones. In case you wish to diversify your portfolio, you may want to have an online demat account to invest in US stock.

The US of A and Investment

There are many advantages of investing in US stock, and taking your financial portfolio out of Indian waters can be a good move. The USA is one of the foremost developed countries in the world today. Here are some advantages that may propel you to open a demat account so you can invest in US stock:  

  • Around 55% of the American market makes up for global market capitalisation. That is far more than any other nation. 
  • The GDP of America is far higher than that of India, and accounts for 15% of the GDP of the world on the whole.
  • The Dow Jones Industrial Average has increased by 70% during the last century, and is only touted to rise in the future. 
  • The NYSE (New York Stock Exchange) is the biggest in the world. 
  • Stock exchanges offer high trading volumes, generating better liquidity. 
  • You get the benefit of fluctuations of exchange rates. 

Now, all these advantages and features of US investment may enthral and excite you, forcing you to think of investment soon. However, you must look before you leap, as you can well fall into an investment trap. With the MO Investor (the app of reputed broker, Motilal Oswal), you may be able to catch some knowledge of investment in the US economy. 

Risks Related to Currency

Once you are aware of certain risks of investing in US stock, the most vital being currency risks, you may just think of Indian investment with an upcoming IPO. Still, if you know details of why US stocks may be a risky proposition related to currencies, you will make decisive moves in investment. 

If you wish to invest in US stock from India, you must engage yourself with two currencies - the US dollar and the Indian Rupee. INR gets remitted from your bank account in India, and gets converted to USD before you buy any US stocks. In the same way, if you opt to sell a US stock, the sale occurs in USD, but whatever proceeds are gained, those are converted into INR in advance of any credit into your bank account. The risk you face here is that, while your stock may rise in value, the value of the USD may drop. Hence, you may not make as much of a return had the value of the USD remained the same as when you bought the stock. These currency fluctuations may make your stock value redundant. When exchange rates change, your stock value could drop. 

Risks Related to Countries

An online demat account facilitates the buying and selling of shares and the storage of shares in electronic formats. This is easy to do in your home country and you can transact when you consider a large number of factors like the economic state of the country, social events and political news affecting the markets.  

For instance, Indians know that, when the yearly budget is declared, markets become more volatile than ever, sensitive to the tiniest announcements made by the government. Investments can be planned based on these factors within India. As an Indian investor, living in India, you are also aware of the approaches of various political factions and how changes made may influence markets. Having such information about the US markets may be a challenge as you are an investor based in India. Although you may do your research, you may still not be able to fruitfully gauge US markets and sentiments behind shifts. 

Risks Related to Interest

History evidently tells investors that increasing rates of interest have a negative influence on the prices of stocks. The US is a debt-bulky country. Therefore, the rising rates of interest can pose a threat to fixed income and equity markets. Let’s say that a company is carrying an existing load of debt, or has to rely on more debt to function, with an increasing interest rate attached, it will be strained under pressure. The costs associated with borrowing rise and the ability of growth and profit-making decreases. Obviously, the stock prices will be negatively impacted. Through apps like the MO Investor, you may be able to find out about a company’s background, but in some cases, you may not. 

Risks Related to Liquidity 

With immense trading volumes, the US stock markets are the largest throughout the globe. Nonetheless, you cannot assume that stocks are traded in big volumes by default. If an Indian wants to invest in US stock, the assumption is that there will always be a buyer for the stocks held. This view is held with confidence because the US markets are highly liquid in nature. Still, assumptions are not the way of any stock markets, and you may find your stocks are not in demand if you venture to sell them. 

Taxation and Regulatory Risks

As an Indian investor, certain tax laws apply when you invest in US stocks. Tax laws can change, depending on the sectors invested in. If these increase, you will be at the receiving end of high taxes levied. Foreign and Indian taxes may apply to stock yields you bear. 

When it comes to the markets, the US possesses different tax and reporting regulations. Changes in regulations impact certain companies based on sectors they are in. Here, too, stock prices may be affected. 

Knowledge-based Investment

It is easy to open a demat account and get your investment going. Based on whether you wish to allocate your funds to stocks in India or the US, or any Indian upcoming IPO, you have to do some thorough groundwork first. Your money is on the line, so investing with patience, care and discipline is of the essence. 

Related Articles: Follow these 5 Expert Advices to Get Started with Investing | 5 Rules Every New Investor Must Know Before Investing | 6 Stock Market Investing Disasters To Stay Away From |  10 common mistakes made by SIP investors | 4 Smart Must-Follow Investment Tips for Beginners in India

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