Investing money in stock markets has become a mass practice in India only in the 21st century. But, how to invest in foreign stocks from India?This is still confusing for many investors especially, in the US markets.
Here is a detailed guide on how to invest in international stocks (US stocks) and how you can kick-start your hassle free international investing journey.
Why should you invest in International Stocks?
The Indian economy has grown leaps and bounds in the last two decades, leaving surplus money in the hands of investors. Investing in international stocks has garnered interest because of better returns and diversification of risk.
- 1) Higher Returns: FAANG Stocks- Facebook (F), Amazon (A), Apple (A), Netflix (N), and Google (G) are the most popular tech stocks in the US markets. As per the NYSE FANG+ index, they have grown almost seven times over the last five years. If you invested $5,000 in FAANG stocks in 2016, this money would be worth $35,000. (excluding the growth of USD against INR). Apart from this, you earn dividends and bonus shares when the company declares it. There are many high-performing companies listed on the US markets that attract investors.
- 2) Diversification of Risk: The US and India differ significantly in geography, politics, growth environment, and policies. Companies around the world are listed on the US stock exchange. Hence, the US markets enjoy more diversified investment opportunities. This way, your risk is also diversified.
- 3) Currency Fluctuations: You can buy US stocks only in USD. So, you have to purchase USD. The currency fluctuations have always favored the USD in the long run. One USD was worth Rs 66 in 2016. Today it is trading between Rs 74-75. In the above example, when you sell the stocks and book your profit, you would get $35,000 x Rs. 75 (instead of Rs. 66).
- 4) Fractional Shares The US stock exchanges allow you to buy any fraction of a share up to 8 decimals. Suppose you want to buy a stock priced at $1,000, but you don’t have enough funds; you are allowed to purchase 0.01 shares for $10.
How to Invest in Foreign Stocks from India?
To invest in the US stock markets, you have to meet the following requirements.
- 1) Demat Account:You need to have a Demat account in your name where the stocks you purchase will be credited. Your broker can help you in submitting the form and the required documents.
- 2) Trading Account: All major stockbrokers in India provide an online trading interface in partnership with international brokers. Many online trading apps have started taking over this market as they also offer a hassle-free Demat account opening facility and an international trading interface.
- 3) Liberalized Remittance Scheme of RBI (LRS): LRS states that the limit on foreign remittances made by an Indian citizen is USD 250,000 per year. This is outlined in the FEMA Act, 1999 by the RBI. So, you cannot invest more than USD 250,000 from India in one year.
- 4) Double Taxation Avoidance Agreement (DTAA): Dividends and profits earned from the US market are taxable in both India and the US. DTAA between India and the US shields the Indian investors from being taxed twice on the same income. The US government taxes only the dividend earned by you.
How to Buy Foreign Stocks from India?
Once you have completed the above formalities, you must know the ways to invest in foreign stocks (US markets). Here are the types of instruments you can buy in the US stock markets and how you can buy them.
- 1) Direct Investment: You can invest directly in stocks of US companies and hold the shares in your Demat account. Stockbrokers and modern trading apps provide real-time trading interfaces. You have to track your investments and do the stock analysis yourself. You can also purchase fractional shares if you don’t have enough funds to buy one share.
- 2) Mutual Funds: You can invest in Mutual Funds if you want to avoid the headache of tracking the performance of your stocks and market movements. These Mutual Funds appoint fund managers to analyze the market movements and manage the funds’ portfolio. Some Mutual Funds also include Global markets in their portfolio. This helps them diversify the risk. The Mutual Funds charge a fee to provide these services. This amount can vary dwelling on various factors.
- 3) Exchange-Traded Funds (ETFs): You can invest in US ETFs to earn a consistent return similar to a market index that they follow. ETFs are less risky compared to other investments. There can be Gold ETFs or NYSE FANG+ ETF. ETFs can also follow global indices or focus on specific countries and regions. These ETFs replicate the portfolio included in the index with the same weights of investment. It ensures returns similar to the market index.
- 4) American Depository Receipts (ADRs): If a foreign company wants to list its stock on the US Stock exchange, it has to issue American Depository Receipts (ADRs). ADRs represent the shares of the original company. One ADR can comprise any number of shares. These can be traded in the same way as any other share. There are three levels of ADRs:
Level 1: These are unsponsored ADRs and can be traded only on OTC (Over-the-counter) exchanges. The companies cannot raise capital through it.
Level 2: The companies can get listed on premier stock exchanges like NYSE, but they cannot be used to raise capital.
Level 3: They can raise capital and get listed on the National Stock Exchanges.
It isn’t challenging to invest in foreign stocks. However, you have to select your brokers and stocks wisely. As great as the past returns look, similar performances in the future cannot be guaranteed. Hence, it is advisable to do thorough research before investing in foreign stocks.
INDmoney is an online platform that can help you open your trading account at zero commission and suggest strategies to choose stocks. Click here to invest in US stocks.