How to invest in American stocks?

Now that you’ve been apprised of both the stock exchanges and the stock indices in the U.S.A, it is time we moved on to the next important part - investing in American markets. In this chapter, we’ll be focusing on how you, as an Indian investor, can participate in the American stock market. Let’s jump right in.  

Can you invest in American stocks?

First off, let’s address the elephant in the room, which is the question of whether you can invest in American stocks. In short, yes, a typical Indian investor can invest in the U.S. stock market. In fact, the Reserve Bank of India (RBI) has laid out an elaborate scheme - the Liberalized Remittance Scheme (LRS) - that contains the rules to do so. 

According to the LRS, you can remit a maximum of up to $250,000 each year for various purposes, including that of buying stocks and investing in the American stock market. So, for instance, if the USD-INR exchange rate is at around Rs. 73.5 per USD, $250,000 translates to around Rs. 1.83 crores. Now, this is quite a huge sum for an average individual looking to invest in the American markets, isn’t it? 

And here’s something that you should know. You can actually remit more than $250,000 in a year. However, for that, you would have to get special permission from the RBI. 

Why should you invest in American Stocks?

Okay, so now that you’ve gotten a solid answer to the if, let’s take a look at the why. Here are some of the reasons you should invest in American stocks.

1. Perfect for diversifying your portfolio

A large number of corporations that are listed on the U.S. stock markets are all extremely huge and have established their presence throughout the world. This makes them perfect candidates for diversification, since they carry low risk. Investing in them can bring your overall investment risk down. 

2. Access to leading tech companies

This is probably the best argument for why you should invest in the American stock market. Almost all of the world’s largest and leading tech companies such as Apple, Microsoft, Netflix, Amazon, Google, Tesla, and a whole lot more are listed there. Investing in these companies can give you immense wealth creation potential that’s far higher than what the Indian stock markets are currently capable of giving. 

3. The U.S. stock markets are quite stable

When it comes to low volatility, the U.S. stock markets are far ahead of their competitors. Although there have been certain incidents in the past that have crashed the stock markets quite badly, the American stock markets are widely considered to be stable, nevertheless. It takes quite a lot to destabilize and cause panic in the U.S. stock markets. 

4. The U.S. stock markets tend to outperform their Indian counterparts

Over the last 10 years, the returns that the U.S. stock markets provided were consistently higher than that of the Indian markets. That’s not all. The USD has also significantly strengthened against the INR, thereby further increasing the return generating potential of investors. 

How do you invest in American stocks?

Finally, we’ve come to the most interesting part of this chapter. Here we’ll be taking a look at the different ways in which you can invest in American stocks. As with the Indian stock market, you can invest in either one of two ways - through the direct route and through the indirect route. Let’s take up one after the other and explore

Direct route

When you buy the individual stocks of American companies, you have effectively invested in the U.S. stock markets through the direct route. There are primarily two different ways of making investments via the direct route. Here’s a brief overview. 

1. Through an account with Indian broking firms having tie ups with U.S. brokers

Before you start buying American stocks, you need to first possess an overseas trading account. A great way to open such an account is through domestic stockbrokers that are in collaboration with U.S. stockbroking firms.

Several major full-service stockbroking firms in India have signed pacts with U.S. investment platforms, allowing you to open an overseas trading account. The U.S. stockbroking firms basically act as an intermediary between you and the American stock market, placing orders and executing trades on your behalf.

Many domestic stockbroking firms with U.S. broking firm tie ups have made the process of opening an overseas trading account extremely easy. You can even do it online through a virtually paperless process. 

Here’s a quick look at the general process involved with opening an overseas trading account. 

• Firstly, you need to submit a duly-filled online application for opening an overseas trading account. 
• Next up, you’d be required to submit all the necessary documents such as your ID proof and your address proof. You might have to mandatorily submit a copy of your PAN and Aadhaar. 
• Once your application is processed and approved, you would have your overseas trading account. 
• The next step would be to add funds. In order to add funds into your overseas trading account, you would have to convert Indian Rupees to U.S. Dollars and remit the same to your trading account. Under the RBI regulations and LRS, this can be done only through authorized dealers like banks. 
• To remit funds to your overseas trading account, you would have to get in touch with your bank and submit a duly filled ‘Form A2’ for the same.
• Once the form is approved, the funds would get remitted to your overseas trading account. 
• You can then use the funds in your trading account to buy American stocks as you wish. 

Here’s something that you should know. Banks might charge a Forex conversion fee in addition to other charges for converting INR to USD and remitting the same to your trading account.  

2. Through an account with a foreign broker

Alternatively, you can also open an overseas trading account through a U.S. based stockbroking firm itself. There are plenty of international brokerage firms registered with the Securities Exchange Commission (SEC) of the U.S. that allow Indian investors to set up an overseas trading account through which you can purchase American stocks.   

Indirect route

If you prefer to not invest in individual American stocks, you can still make use of the wealth creation opportunities offered by the U.S. stock markets through the indirect route. This route involves investing in mutual funds and Exchange Traded Funds (ETFs) that have American stocks and indexes as a base. Let’s take a quick look at this method.   

1. Through mutual funds and ETFs

Investing in mutual funds that in turn invest the pooled money into U.S. stocks is one of the most hassle-free ways to participate in the American stock market. By adopting this approach, you can avoid the lengthy documentation process involved in creating and funding an overseas trading account. That’s not all. You can also do away with the meticulous stock selection process, which you would have to otherwise carry out if you’re investing through the direct route. 

There are many Indian Asset Management Companies (AMCs) and fund houses that offer mutual funds that invest in global equities including U.S. stocks. In addition to these, there are several feeder funds that invest pooled money into U.S. mutual funds as well, giving you ample exposure to American stocks. If you prefer investing in U.S. indexes, you could also opt to invest in Indian ETFs that have U.S. indexes as a base.

That said, here’s something that you need to know. Mutual funds that invest in American stocks and U.S. mutual funds tend to charge a significantly higher expense and management fees compared to mutual funds that invest in domestic companies.

Wrapping up

With this, we’ve finally come to the end of this chapter. We hope you’re clear on the different ways through which you can invest in American stocks. In the next chapter, we’ll be delving even deeper to cover the various tax ramifications and other charges that you need to take into consideration when investing in the American stock market.

A quick recap

• The typical Indian investor can invest in the U.S. stock market. In fact, the Reserve Bank of India (RBI) has laid out an elaborate scheme - the Liberalized Remittance Scheme (LRS) - that contains the rules to do so.
• According to the LRS, you can remit a maximum of up to $250,000 each year for various purposes, including that of buying stocks and investing in the American stock market. 
• There are many reasons American stocks make for good investments. They are quite stable, they diversify your portfolio, give you access to leading tech stocks, and they tend to outperform their Indian counterparts.
• You can invest in American stocks through the direct route or the indirect route. 
• When you buy the individual stocks of American companies, you have effectively invested in the U.S. stock markets through the direct route. 
• Before you start buying American stocks, you need to first possess an overseas trading account. A great way to open such an account is through domestic stockbrokers that are in collaboration with U.S. stockbroking firms. 
• Several major full-service stockbroking firms in India have signed pacts with U.S. investment platforms, allowing you to open an overseas trading account. 
• Alternatively, you can also open an overseas trading account through a U.S. based stockbroking firm itself. 
• If you prefer to not invest in individual American stocks, you can still make use of the wealth creation opportunities offered by the U.S. stock markets through the indirect route. This route involves investing in mutual funds and Exchange Traded Funds (ETFs) that have American stocks and indexes as a base.