As an Indian investor, you must have thought about investing in the US stock market, given the global giants listed on its stock exchanges. Who does not want a part of the fastest growing MNCs in a highly valued market and get global exposure?
But exposing your portfolio to the US stock market crop up a range of questions – is it safe to invest in US stocks? How different is investing in US stocks from investing in Indian markets? What factors influence investing decisions in the US market? How much can an Indian invest in US stocks? Can we invest in US stocks from India? To answer these questions, it is important that you do your research. This involves a comprehensive comparison of the Indian and US stock market. But why is this important? Let us find out.
Why should you compare the two stock markets?
While making an investment decision, it is vital to look at all the things that may influence your returns as well as risk. This is even more crucial when you are looking to invest in different markets across the globe.
The economies of India and the US are quite different. India is a developing economy, while the US is a developed one. This means that the stock markets of the two countries also have some major differences.
This includes not just the differences in terms of the listed companies but also in regulation, volatility, valuation, size, and more. In fact, something as basic as the currency of exchange differs. Moreover, the Indian and the US stock markets are influenced by different factors, and they react differently to the various global events. Thus, you cannot employ the same investing strategies in the US as you would in India.
So, if you are planning to invest in stocks in the US, it becomes important to compare the Indian stock market with the US stock market. This will help you understand the pros and cons of investing in each of these markets and also give you a better idea about where to invest.
To understand this in greater detail, let us look at the differences between the Indian and US stock markets.
Factors that help you differentiate between Indian and US stock investing
When it comes to investing in the Indian or the US stock market, you must get complete knowledge of how the two stock markets differ before you put your money in. Based on certain key factors that set the two stock markets apart, the return you earn on your investment and the risk involved differs.
You can differentiate between the two markets based on the following factors:
Volatility refers to the swings in the market. We know that the stock markets are subject to constant fluctuations, and volatility measures how frequent and significant they are. It is calculated as the standard deviation of returns around the mean (average) of the returns. The higher the volatility, the higher the risk in the market.
The Indian stock market is more volatile than the US stock market when you are looking at it from the point of view of long-term investments. This means that share prices can go up and down very quickly, and investors may find it difficult to predict which way the market will move.
It is thus advised that you diversify your portfolio well. In fact, you can add foreign investments to your portfolio to get the benefit from different market trends. This allows you to spread your risk across various market segments, reducing the overall risk of your portfolio.
Size and valuation of the market
The US stock market is much larger in size as well as valuation. As of January 2022, the US stock market holds about a 59.9% share in the value of total world equity markets. In contrast, India has a share of only about 1.5%. If we look at it from the point of view of market capitalisation, in March 2022, the Indian stock market stood among the top five stock markets with a market cap of $3.21 trillion. However, it still lagged behind the US stock market, which topped the list at a whopping $47.32 trillion market cap.
Thus, we can see that the US stock market is about 15 times bigger than the Indian stock market. This difference in size also affects the liquidity of the two markets. The US market is much more liquid than the Indian one. This means that it is easier to buy and sell stocks in the US market as there is always someone willing to trade. However, this difference in the valuation is not surprising, considering the difference in the size of the two countries.
Currency of exchange
When you invest in the US stock market, you will be dealing in terms of US dollars (USD). This is because most of the companies listed on US exchanges are based in the United States. Similarly, when you invest in the Indian stock market, you will be using Indian rupees (INR) as the currency of exchange.
This is important to consider because the value of your investment will be affected by changes in currency exchange rates. For example, if the US dollar strengthens against the Indian rupee, then your investment in Indian stocks will be worth less in terms of US dollars. Similarly, if the Indian rupee weakens against the US dollar, then your investment in US stocks will be worth more in terms of Indian rupees. In such a case, is it safe to invest in US stocks from India?
Frankly, yes. Note that while investing in foreign markets comes with its set of challenges, it does not render it unsafe. However, you need to be aware of currency fluctuations when you are investing in foreign markets. In fact, you may also use this to your advantage. For instance, if the rupee loses value and a portion of your investment is in USD, your investment value will rise in terms of INR, which is the currency of your home country. If you cash in your investment, you will get more rupees per dollar as compared to the rate at which you invested. Similarly, if the USD rises, your investment value (in USD) will rise, even if there is no change in your portfolio.
The Indian stock market is regulated by the Securities and Exchange Board of India (SEBI). Its counterpart in the US is the Securities and Exchange Commission (SEC). Both these regulators play a major role in overseeing the everyday activities in their respective stock exchanges.
SEBI was set up as a statutory body in the year 1992. Ever since then, it has been the primary body that regulates the Indian stock exchanges. Moreover, it works towards developing the stock market, providing information to all the market players, and most importantly, protecting the interests of the investors. It also has the power to investigate any matter that pertains to the stock markets in India.
The SEC was established in 1934 with the passing of the Securities Exchange Act. It is a federal Government agency that is responsible for protecting investors and maintaining fair, orderly, and efficient markets.
Most investors tend to think that there is less investor protection in the Indian stock market than in the US stock market. This means that investors may be at risk of losing their money if a company goes bankrupt or if there is fraud. However, with regular control and checks in place, this statement can be seen as far from reality.
In fact, while you may believe that the SEC has greater powers than SEBI, this is quite a debatable topic. Taking the case of Raj Rajaratnam into consideration, we can see how so. To resolve and move ahead with the insider trading case, the SEC had to reach out to the court of law and ask them to restrain the accused party and charge the monetary penalties. In India, however, SEBI has all the rights to investigate matters and charge any applicable penalty from the accused. SEBI does not act as an intermediary, while the SEC may be in such a position.
Before investing in the shares of any company, it is very important to conduct proper research about its growth prospects, the fundamentals of its stocks, the stability of its profits, its dividend policy, and more. All this information must be freely available to the investors for them to make a rational and well-informed decision.
Investors in the Indian stock market may need to spend more time on the research than investors in the US stock market. This is because there is less information available about Indian companies. On the flip side, the research may need to be more extensive for the investors in the US stock market because of the large number of companies listed on the exchanges.
While the regulators of both the stock markets aim to make all material information accessible to the investors, it is vital that you make an effort to research before employing your funds.
Top performing sectors
The top performing sectors in the Indian stock market are different from the top performing sectors in the US stock market. In India, the top performing sectors are typically those that are linked to the country’s economic growth, such as infrastructure and resources. If you look at the stock market situation in 2022, there has been a fall in the market. Many top-performing sectors have faced the brunt of massive sell-offs. However, the sectors that stood their ground even during such a phase include metals, utilities, and power.
In the US, the top performing sectors tend to be those that are more stable, such as healthcare and technology. Even with the high volatility and the downward trend in the market, sectors that remained fairly stable included communication services as well as healthcare. These sectors have been known to perform well historically.
While investing, it is always advised that you diversify your portfolio across a number of sectors. If you only invest in sectors that are expected to show high returns but also carry a higher risk, you are increasing the chances of incurring losses. But if you spread your investments across different sectors, the risk involved is mitigated. You can pick a few stable sectors to fall back on in case another one goes south.
For instance, when investing in the Indian stock market, you can choose to invest some of your funds in metals, which is a sector that has shown relatively stable returns. Allocate some funds in the IT sector, which has shown immense growth and high returns over the years, and some in other sectors such as the automobiles or the FMCG sector. Similarly, you can do so in the US by spreading your investment across, say, the healthcare and the communications sectors.
A vast majority of the multinational corporations are listed on the US stock exchange, including big names like Amazon, Meta, Google, and many more. These multinationals operate across the globe and are affected by the events in many different countries. This gives the US stock market a lot of global exposure.
Similarly, looking at it from a different point of view, when you invest in the US stock market, you are also exposed to companies from all over the world. This increases your investment avenues, allowing you to hold a share in some of the fastest growing and highly valued companies in the world.
The Indian stock market, on the other hand, is mostly made up of domestic companies. So, when you invest in stocks listed on the Indian stock exchanges, your exposure to global factors is limited. This means that your investment is more influenced by domestic factors such as the political and economic conditions of the country. Moreover, you get comparatively restricted access to the global giants.
Portfolio diversification is important because it helps to reduce risk. By investing in a variety of different asset types, you can protect yourself from the losses that might be incurred if one particular investment fails.
The Indian stock market is still relatively young, and it has a long way to grow before it catches up to the US stock market. Moreover, because of the large size of the US stock market, there are a lot more investment avenues available in it as compared to the Indian stock market. This means that investors in the US have more options when it comes to diversifying their portfolios.
On the other hand, because the Indian stock market is smaller, there are fewer investment opportunities available. This can make it harder to diversify your portfolio. However, it offers a lot of potential for investors who are willing to do their research and take on a little bit more risk.
That being said, you can learn how to diversify your portfolio even if you are investing in just the Indian stock market. This is because diversification is not just limited to investing in the shares of different companies. You can always take up other investment options, such as commodities, mutual funds, and even Government securities, which are considered almost risk-free.
To understand this in greater detail, read our blog on ‘stock investing in India – what is diversification of portfolio?‘ on the Teji Mandi blog.
The most successful investment strategies in the Indian stock market may not be successful in the US market, and vice versa. This is because the two markets are very different and require different approaches.
When investing in the US stock market, you must focus on the strategy of investing in good quality companies that have a solid track record and are well-established.
The Indian stock market is more volatile, so you need to be more careful when choosing investments. It is important to do your research and choose companies that have strong fundamentals and are likely to weather the ups and downs of the market. To understand how to read the fundamentals of a stock, go through our A-Z guide on analysing stock fundamentals on the Teji Mandi blog.
Apart from this, in India, a company can only get listed on the stock exchange after three years of its existence and having at least two years of positive net worth. However, a US company can get listed much earlier. This allows you to invest in the latest startups in the US and capitalise on new ideas. This is not a possibility in India.
Return on Investment
The return on investment in the two stock markets can be compared by looking at the average returns over the long term of the major indices of each stock market.
In India, the BSE Sensex has shown consistent growth in its returns, despite volatility in the short term. In fact, since its inception, the Sensex has grown 560 times! In the past 42 years, the index has provided a CAGR of 15% to its long-term investors. As of 2022, the Sensex generates an annual return of 18%. The 10-year returns of the index stand at 13% and the figure for the 5-year returns is 15%. Another major index in the Indian stock market is the Nifty 50 index, which comprises the top 50 companies listed on the NSE. Over the last 15 years, the index has beaten the inflation rates, providing an annual average return of 12%.
It can be concluded that even though there is volatility in the market in the short run, holding the equities over a long period proves fruitful for the investors of the Indian stock market.
On the other hand, one of the major indices that serves as a benchmark of the overall performance of the US stock market, the S&P 500 index, was established in 1957. Over these 65 years, the index has displayed a 10.7% historic average return. Over the last 10 years, the annual average returns have been around 14.7%, beating this historical average figure. Looking at its performance over the years, we can see that the average annual return of the S&P 500 has fluctuated widely every year. For instance, in 2020, the annual returns were 18.4%, while in 2021, the figure was 28.7%. This shows high volatility in the US stock market.
Looking at the Dow Jones Industrial Average (DJIA) index, which is another major index of the US stock market, we can see the 10-year average annual returns amount to 15.03%. This figure was 7.03% if we look at the 20-year average and 10.99% in the last 30 years.
Overall, it can be seen that the long-term average return in the Indian stock exchange has been higher than that in the US stock exchange. Both the markets are highly volatile, however, if you are a long-term investor, you can successfully ride out the highs and lows of the market to earn good returns on your investment.
The listing requirements for companies are stricter in the US than they are in India. This means that companies that list on US exchanges must meet higher standards than those that list on Indian exchanges.
These standards include requirements regarding the disclosure of financial information, corporate governance, and other matters. As a result, companies that list on US exchanges are typically larger and more established than those that list on Indian exchanges.
However, it takes longer in terms of the life of the company to get listed on the Indian stock exchange. As mentioned before, a company must exist for at least three years before it can be listed on the NSE. Moreover, it must also show profits for two years. However, a new company, too, is eligible to get listed on the US stock exchanges.
Apart from this, the process of listing in the US is also more expensive than it is in India. For instance, the fees for listing on the NYSE start at $500,000. In comparison, the initial listing fee on the National Stock Exchange of India is Rs. 50,000, which is a much smaller amount.
This sums up the major differences between the two stock markets. The above-mentioned factors influence the trends in the two stock markets, which further has an impact on the way you invest, the returns you can earn, and the potential risk involved.
You must carefully consider all these factors before you start investing. To get a quick overview, let us summarise the difference between the two:
|Basis||US stock investing||Indian stock investing|
|Market volatility||The US stock market is less volatile in terms of long term investments.||The Indian stock market is considered to be comparatively more volatile.|
|Size and valuation||The US market is much larger in terms of both size and valuation. It is the largest stock market in the world with a market cap of $47.32 trillion.||The Indian stock market is ranked 5th in the world in terms of market capitalisation, which is $3.21 trillion.|
|Currency of exchange||The buying and selling is done in terms of the US Dollars.||The Indian Rupee (INR) is the currency used.|
|Regulation||The US stock market is regulated by the US Securities and Exchange Commission (SEC).||The Securities and Exchange Board of India (SEBI) is the regulator of the Indian stock market.|
|Research requirement||Extensive research is required because of the large number of listed companies.||Research is more crucial as well as time consuming as not all information is easily available.|
|Top performing sectors||Stable sectors such as healthcare and technology are top performers.||Sectors linked with economic growth, such as power, are the top performers.|
|Global exposure||There is higher global exposure because of various MNCs listed on the US exchanges.||There is less global exposure as the Indian exchanges comprise mainly the domestic companies.|
|Portfolio diversification||There are a lot more avenues for investing because of the larger size of the US stock market.||The scope for diversification is less when compared to the US stock market.|
|Investment strategies||Focus should be on investing in companies with a good track record. You can also invest in new companies and capitalise on new ideas.||Focus should be on proper research before investing. Investment should be done in well-established companies.|
|Return on investment||Historically, the average annual return on investment has been approximately 10%.||The average annual return on investment has been around 15%, which is higher than the US stock market.|
|Listing requirements||More stricter listing requirements and a higher listing fee is charged.||Listing is more time consuming, as a company must be at least 3 years old before it can get listed.|
Now that we have understood the difference between the two stock markets, let us delve deeper. The performance of a stock market can be judged well by looking at the performance of its major indices.
To understand how the Indian and the US stock markets perform, let us have a look at a major index of each stock market – the Dow Jones Industrial Average (DJIA) index and the BSE Sensex.
Dow Jones vs Sensex: a comparison
The Dow Jones Industrial Average (DJIA) is the stock market index of the US stock market, while the BSE Sensex is one of the stock market indices in the Indian stock market.
Here is a comparison of the two indices:
- The DJIA is made up of 30 large companies that are listed on the New York Stock Exchange (NYSE). These companies are leaders in their respective industries and are among the most widely followed stocks in the US. The Sensex is made up of 30 large companies that are listed on the Bombay Stock Exchange (BSE). These companies represent a variety of sectors, including information technology, banking, and consumer goods.
- The DJIA is a price-weighted index, which means that the stocks with the highest share prices have the biggest impact on the index. The Sensex is a market-weighted index, which means that all stocks in the index are given equal weightage regardless of their share price.
- The DJIA is a widely followed index that is used to gauge the performance of the US stock market. The Sensex is the most popular index in India and is used to gauge the performance of the Indian stock market.
- The DJIA is a less volatile index than the Sensex, which means that it experiences smaller swings in value.
- The DJIA is a more global index than the Sensex, which means that it is influenced by events happening around the world.
- The DJIA is a better indicator of the US stock market than the Sensex is of the Indian stock market. This is because the DJIA is made up of companies that are leaders in their respective industries, while the Sensex is made up of a variety of companies from different sectors.
When investing in the US stock market, it is important to keep an eye on the DJIA. When investing in the Indian stock market, it is important to keep an eye on the Sensex. This will help you navigate Indian stock investing and US stock investing better.
Understanding the differences between investing in the two markets opens up a lot more opportunities for you to allocate your funds. You do not have to be in the US to put your funds in the US stock market. You can easily do so while sitting in India. Let us see how to invest in US stocks from India.
Indian stock investing differs vastly from US stock investing. Be it the size, valuation, and volatility of the markets, or cost of investing and their global exposure, the two stock markets work in separate ways. It is thus vital to do your research before you decide to step into the US stock market. That said, exposing your portfolio to this global market in a calculated and risk-analyzed manner may benefit in terms of geographical diversification and in returns too.
To navigate your way through the Stock investing, reach out to the experts at Teji Mandi. We give active investing advice and professionally-managed portfolio to help you build a desired corpus while keeping your risk tolerance in mind. Tak a look at actively-managed portfilio offers by Teji Mandi