Why Invest in US Stocks: Is the Risk Worth the Reward?
Thinking of diversifying your investments globally? The US stock market might just be the avenue you haven't explored yet.
The best part?
We're about to uncover the reasons why US stocks have long been a magnet for global investors and how you can potentially reap rewards even amidst market uncertainties. Beyond the fame of Wall Street, lies a realm of opportunities and risks that every informed investor should be aware of.
If you're on the fence about branching out to US stocks or if you're curious about the balance between its risks and rewards, this guide is custom-made for you.
Investing in the US isn't just about chasing the giants; it's about understanding the dynamics of a market that has shaped global finance.
Ready to discover why you should invest in US stocks? Dive in as we break down the pros and cons of placing your bets on the American market!
Investing in US Stocks
Dipping your toes into the US stock market is much like navigating the intricacies of a global maze.
It entails:
- Understanding market behaviors,
- Aligning your portfolio with global trends
- And swiftly adapting to the ebbs and flows of international economic dynamics.
Let’s Start With The Benefits First - Pros of Investing in US Stocks
We shall look at the good side first. US stocks are considered to be the first-rate option according to the stock market experts. Here are some of the benefits of investing your money in the United States stock market:
1. Access To Multinational Companies
The US houses a plethora of globally recognized corporations. For instance, in 2023, Apple’s market cap surpassed $2.76 trillion, making it the most valuable company globally. These MNCs, like Facebook (Meta Platforms), Google, and Amazon, are not just significant in size but also in their contribution to shareholders. For instance, Apple's stock appreciated over 80% in 2020 alone, showcasing the potential growth investors can tap into.
Some of these companies are constantly growing and providing their shareholders with a substantial chunk of profits. It may help you to reach unprecedented growth in your investment portfolio.
2. Excellent Returns
If you live in a country where the stock market is extremely fragile, the returns might be a bare minimum. However, when you look at the US market, the S&P 500 has delivered an average return of 18.7% over the past year, and the NASDAQ provided an impressive 27.8% return. This not only showcases its potential but the fact that some of the biggest companies in the world are operating here provides a safety cushion to your investments.
But since some of the biggest companies in the world are operating here, you can expect safety on your investments and their returns. Top global IT giants operating in the US are known to have produced consistently great returns.
3. Diversified Portfolio
When you reach out to a stock market expert, the first thing that he tells you is to diversify your portfolio. It is to decrease the amount of risk and maintain consistent profits on your investments. Since you will find all kinds of safe business houses in the US market, your diversified portfolio may help minimize risk and maximize returns.
You won't just get the exposure to US stocks here. You will also get exposure to stocks from other countries that are listed in the US stock market.
4. Buying A Fraction Of A Stock
A revolutionary feature in the US investment scene is fractional shares. Platforms like Robinhood and Charles Schwab introduced this, allowing investors to own parts of a stock. For example, instead of buying a whole share of Amazon, which, in 2020, was priced over $3,000, an investor can invest with as little as $1, owning a fraction of that share.
These tokens are much like cryptocurrencies which you can buy for their value rather than amount. So if you're just starting to invest, it will be a great deal to buy a fraction of a stock. You can go full throttle with your investments later once you understand the market better.
5. The US Market Index
If you want to ensure the maximum safety of your investments, you should consider looking into the US market index. This is an index that will give you access to some of the safest stocks available in the market.
This index will make a list of the top companies that are providing the best returns to the investors. One such index is the S&P 500 index, which contains the top global companies, including top US stocks. If you're just starting with your investment journey, this will act as a guide for you.
6. The US Dollar Appreciation
The reason why most experts advise you to invest in the US stock market is the appreciation of the US dollar. Historically, the USD has appreciated by an average of 10% against a basket of major world currencies, emphasizing the strength and stability of the American economy.
Even if you're making normal profits, it will lead to a bigger number once the amount is converted from USD to your home currency. So if you see a rise in the value of USD in comparison to your home currency, it will be an intelligent option to invest in US stocks.
Now The Potential Risks That Are Involved - Cons of Investing in US Stocks
We talked about all the amazing benefits that you can get from investing in the US stock market. Let's take a look at the risks of investing in US stocks:
1. Improper Research
When you invest in your home country, the familiarity is palpable. For instance, in 2019, a Gallup Poll found that only 54% of Americans were invested in the stock market, signaling that even locals might not be fully aware of the market intricacies. Now, if you’re an outsider, understanding the market nuances, especially influenced by volatile political dynamics, can be even more challenging. Without proper research, there's a potential to misunderstand the current market sentiment, leading to misguided investments.
Since the political dynamics of a country can also impact its stock market, you may not have the full knowledge of market dynamics that can affect your investments.
2. Interest-Related Risks
The US debt has been on a steady rise. As of 2023, the national debt stood at over $31.4 trillion, up from $23 trillion in 2019. With such a debt-heavy economy, many business giants are leveraged to sustain growth.
In situations where interest rates rise - as they did in 2018 when the Federal Reserve hiked rates four times, leading to stock market fluctuations - businesses face increased borrowing costs. This can suppress their growth potential and, subsequently, the value of their stocks.
When businesses stop making big profits, their reputation goes down, and so does the demand for their stocks. These interest-related risks can change the dynamics of the stock market completely.
3. Currency-Related Risks
Historically, the US dollar (USD) has shown dominance. But like all currencies, it's not immune to fluctuations. Between 2002 to 2008, the USD Index (DXY), which measures the dollar against a basket of major world currencies, declined by approximately 41%. Such volatility can significantly impact foreign investments. Even if your stocks appreciate, a devalued USD can erode those profits when converting back to your home currency.
But in case the value of the dollar drops, it can be a huge risk. Even if you're making profits on your investments, the same profits might not show up on your bank balance when you withdraw that money in your home currency.
4. Taxation Risks
Taxation in the US can be complex, especially for foreign investors. For instance, non-resident aliens in the US are subject to a 30% withholding tax on dividends. This rate can be reduced if there's a tax treaty between the US and the investor's home country.
In fact, under the Tax Cuts and Jobs Act of 2017, the corporate tax rate was reduced from 35% to 21%. While such a cut benefits businesses, there's always the potential for future administrations to revise tax rates, adding an element of unpredictability to your investments.
Tax laws can change with time. If you don't have any prior information about future changes, it can always lead to a problem. The tax laws don't impact every business house, but they might impact a certain bunch of them. Investing in those business houses might lead to big losses.
Key Takeaways
Venturing into the realm of US stock investments may feel overwhelming at first, especially with the interplay of risks and rewards. But understanding and harnessing the potential of the American market can be a game-changer for your financial journey.
Remember, it's not just about the immediate gains; it's about strategic planning and comprehending market dynamics. Diversity in a portfolio is essential, and adding US stocks can give you that global edge, protecting against localized economic downturns.
Watch for golden opportunities and game-changing stocks that might emerge as leaders in their sectors. With the US being home to numerous industry giants and innovative startups, there are plenty of opportunities to grab.
However, consistency in research and keeping abreast with market news will always be your best allies.
Investing is like sailing in vast oceans, full of storms and calm waters alike. So, remain vigilant, adapt to changing tides, and don't hesitate to consult with financial advisors when charting unfamiliar territories. Remember, by embracing the challenges and rewards of the US market, you're positioning yourself for a broader and more resilient financial future.
Fortunately, the INDmoney App lets you invest in US stocks from India.
If you're eager to dive deeper:
- How can you spot emerging US market leaders?
- What strategies work best for US stock investments?
- How can you hedge against potential risks in the US market?
Stay tuned for our subsequent articles, and consider exploring the INDmoney App to gain a more informed perspective. We'll occasionally highlight features from our app that can be instrumental in shaping your strategy for US stock investments.
Thank you for joining us on this exploration. Share this insight with someone you believe could benefit from it.