Glossary: 20 terms you should know before investing in the American stock market

1. New York Stock Exchange (NYSE)

The New York Stock Exchange (NYSE) is the largest stock exchange not only in the U.S.A, but also the world. The total market capitalization of the exchange currently stands at $26.23 trillion as of February, 2021.

2. National Association of Securities Dealers Automated Quotation System (Nasdaq)

Created by the National Association of Securities Dealers (NASD), the Nasdaq has more relaxed listing requirements and regulations. This makes the exchange a very favourable destination for startups and other nascent companies to gain access to capital. The Nasdaq also follows the same opening and closing times as the NYSE.   

3. The Nasdaq Composite Index 

The Nasdaq Composite Index is a broad market index that consists of all of the companies listed in the Nasdaq exchange. Featuring more than 2,500 constituents, the Nasdaq Composite Index is one of the best indicators of the American economy.

4. The S&P 500

The S&P 500 index consists of the top 500 companies in the American stock market. Although the index has only 500 constituents, it still represents around 80% of the total U.S. stock market, making it a very good indicator. That said, the constituents of the S&P 500 are mostly large-cap companies across multiple sectors and sub-sectors.

5. The Dow Jones Industrial Average (DJIA)

Consisting of the top 30 companies in the U.S., the Dow Jones Industrial Average (DJIA) is easily one of the most popular and widely used indexes. Unlike most other indexes in the American markets, the DJIA is price-weighted instead of being weighted according to the market capitalization. 

6. The Wilshire 5000 Total Market Index 

Contrary to its name, the Wilshire 5000 doesn’t consist of 5,000 companies. Instead, it only features around 3,500. That said, when it was first introduced in the year 1974, it did in fact contain 5,000 stocks. Again, as with the Nasdaq Composite Index and the S&P 500, the Wilshire 5000 also makes use of the market capitalization weighted method. 

7. Long-Term Capital Gains (LTCG)

If you hold American stocks for more than 24 months, they are automatically considered to be long-term holdings. And when you finally sell the stocks, the gains that you realize are categorized as Long-Term Capital Gains (LTCG) and are taxed in India at 20%, with indexation benefits.

Similarly, if you hold American mutual funds for more than 36 months, they are automatically categorized as long-term holding. And the gains arising from the sale of such mutual funds are treated as Long-Term Capital Gains (LTCG) and taxed in India at 20% with indexation benefits. 

8. Short-Term Capital Gains (STCG)

U.S. stocks holdings that are less than 24 months and U.S. mutual funds holdings that are less than 36 months are automatically considered as short-term holdings. The gains that you realize from selling these short-term holdings are termed Short-Term Capital Gains (STCG) and are taxed in India at your current income tax slab rate.

9. Taxes on dividends 

These are the taxes levied on the dividends you receive from the stocks you’ve invested in. In the U.S., dividends that a company pays out to its investors are taxed in the hands of the investor at a flat rate of 25%. 

10. Conversion charges

The USD-INR currency exchange rate that you see everyday is not the same rate that banks charge for converting the two currencies. They add certain other charges and fees for the same. These are known as conversion charges, and they could invariably end up increasing your costs. 

11. Gross Domestic Product (GDP)

The Gross Domestic Product (GDP) is a metric that measures the total value of all the finished goods and services produced by a country in a year. It is a key indicator that shows you just how a country has performed. 

12. Core Consumer Price Index (CPI)

It measures the changes in the prices of goods and services for a given period of time. The Core CPI data is released by the U.S. government on a monthly and quarterly basis. If you are interested in investing in American stocks, make sure you keep an eye on these numbers.

13. Industrial output

The Federal Reserve releases the industrial production output data each month, which basically serves as a very important indicator of the country’s economic health. 

In addition to providing you with the total output from the various industries in the country, it also gives you insights into the total capacity utilization. If the industrial output and capacity utilization are low, then the economy is considered to possess a negative outlook. On the other hand, if the industrial output is nearabout its capacity, then it may be interpreted as a sign of the economy doing well.

14. Retail sales numbers

This data includes retail sales of consumer durable and non-durable goods and services. Retail sales data is a very good metric that experts use to gauge consumer demand in the country.

15. U.S. tech sector

This is also known as the IT sector, and it includes companies that produce software, hardware or semiconductor equipment, or companies that provide internet or related services. Among all the major sectors in the American stock market, the IT sector sits comfortably at the second spot in terms of market capitalization. With around $13.75 Trillion in market cap, it is one of the top sectors in the American economy. Research reveals that the U.S. tech sector accounts for around 12% of the country’s total GDP and is responsible for providing more than 18 million jobs in the U.S. alone. 

16. Consumer discretionary sector

The consumer discretionary sector consists of companies that manufacture or provide consumer luxury goods and services. In other words, companies that manufacture non-essential goods such as electronic devices, cars, and jewellery typically appear under this sector. 

17. Consumer staples sector

Companies in this sector are involved in the manufacture of all the products that are considered to be necessary in life. This includes household products, personal care products, and also food and beverages.

18. American Depository Receipts (ADRs)

American Depository Receipts (ADRs) are basically shares of a foreign company that are issued in the U.S. through an intermediary depository bank. 

19. Global Depository Receipts (GDRs) 

Global Depository Receipts (GDRs) are the shares of a foreign company that are issued in multiple different foreign countries through an intermediary depository bank, hence the name ‘Global.’

20. Fractional share ownership

The American markets allow for fractional investing. So, instead of buying one whole share of a company, you can invest in a fraction of its shares - like half a share or a quarter of a share.

This brings in a great deal of ease for investors looking to invest in high-priced shares with limited funds. If you count yourself in this category, it’s a good idea to keep in mind that the American markets support fractional investing.