The U.S. Stock market, with its impressive track record of growth and innovation, has attracted investors from all around the world. If you’re an investor based in India looking to exploit the potential of the U.S. stock market, read this step-by-step guide designed to lead you from getting an understanding of the basics to executing your first stock trade.

Why is the U.S. Stock Market Attractive to Indian Investors?

There are several reasons why the U.S. stock market is particularly attractive to Indian investors:

• Portfolio diversification. Investing in the U.S. stock market allows Indian investors to diversify their portfolios geographically, buying assets outside the Indian stock market. This can help reduce overall risk because the U.S. market is one of the largest and most diverse in the world, with companies spanning various sectors and industries.
• Global brands and technology. The U.S. is home to many globally recognized and influential companies in technology, healthcare, finance, and other sectors. Investing in these companies can provide exposure to innovative technologies and trends driving global markets.
• Potential for higher returns. Historically, the U.S. stock market has shown strong long-term growth trends, resulting in potentially higher returns compared to some other markets.
• Currency hedge. Investing in the U.S. stock market can also provide currency diversification for Indian investors. Holding investments in U.S. dollars can act as a hedge against fluctuations in the Indian rupee.

How Can Indian Investors Profit From the U.S. Stock Market?

The three main ways Indian investors can profit from financial activities in the U.S. stock market are: direct investment, trading, and ETFs investing. While the first two imply a more direct involvement into investing, the third one is a ready-made option suitable for investors who are limited in time and prefer to rely on a third party in building their portfolios.

Direct investment in U.S. stocks

Direct investment involves purchasing shares of U.S. companies listed on American stock exchanges. To execute this strategy, Indian investors can open an international brokerage account that allows them to buy and sell U.S. stocks directly. This way, you can own shares in companies that you believe in, along with the potential for long-term growth and dividends. However, it’s important to note that direct investing may require substantial capital and can be subject to currency risks.

Trading U.S. stocks

Several online brokerage platforms cater to Indian investors looking to trade in the U.S. stock market. These platforms provide access to a wide range of CFD (contract for difference) assets, including U.S. and international stocks, which are used for intraday trading. Investors can open accounts, deposit funds in Indian rupee, and trade in U.S. dollars. One key advantage of using online international brokers is the convenience and accessibility they offer, which make it much easier to enter the financial markets for an investor with a small to medium budget.

Investing in Exchange-Traded Funds (ETFs)

ETFs are investment funds that trade on stock exchanges, representing a diversified portfolio of assets. Indian investors can choose from a variety of U.S.-based ETFs that track indices like the S&P 500 or specific sectors. Investing in ETFs provides exposure to a wide range of U.S. companies as part of the already composed portfolios.

How to Start Trading U.S. Stocks From India?

Trading U.S. stocks is a more accessible and convenient option than direct investment, and is therefore becoming increasingly popular in India. Here are the necessary steps you need to take to trade U.S. stocks from India:

1. Select a reliable online stock broker in India. Choosing the right foreign broker is crucial. Look for a broker that offers access to U.S. markets, has a user-friendly trading platform, low spreads and brokerage fees, and responsive customer support.
2. Create a trading account. Choose the type of trading account that suits your investing approach and financial goals. You might consider opening a demo account first to practice your skills with simulated funds before depositing real money.
3. Make a deposit. Most international brokers allow you to fund your trading account in Indian rupees. The broker will then convert your rupees into U.S. dollars, which you can use to trade foreign stocks.
4. Start trading. Find a technical or fundamental analysis you trust online or analyse the U.S. stocks yourself, and use your trading strategy to profit from their price fluctuations. Use risk management techniques to avoid unnecessary losses.
5. Withdraw profits. Online stock brokers typically provide a variety of methods you can use to deposit and withdraw your funds. However, due to security rules, investors are often required to withdraw their funds via the same method they used for depositing. Keep that in mind and choose the deposit option accordingly.
6. Pay taxes on trading profits. In India, you are required to pay taxes on profits from investing and trading activities. The taxation rules can be quite complex and vary based on factors such as the type of investment, the duration for which you hold the investment, and your overall income.

Tax Rules for Investors From India

As mentioned above, the taxation rules for Indian investors can be complicated. Based on your preferred type of investment activities, you will most likely have to pay different taxes. However, some of the taxes apply to all types of investment vehicles.

What taxes will a long-term U.S. stock investor pay?

If you hold an investment, such as foreign stocks or ETFs, for more than 12 months, any profits from selling them are considered long-term capital gains (LTCG). According to Section 112A of Income Tax Act, LTCG are taxed at 10% for gains exceeding INR 1 lakh.

If the holding period is less than 12 months, the profits you make from selling an investment are considered short-term capital gains (STCG). According to Section 111A of Income Tax Act, STCG are taxed at 15% (plus any applicable surcharge and cess).

What taxes will a U.S. stock day trader pay?

The income from intraday trading is referred to as speculative business income and has no separate tax rate. It is taxed according to your income tax slab.

Tax collected at source (TCS)

According to the ITD (Income Tax Department, Government of India), tax collected at source (TCS) is an additional amount collected as tax by a seller of specified goods from the buyer at the time of sale over and above the sale amount, which is then remitted to the government account. This tax is levied on foreign remittances, such as investments in the U.S. stock market, under the Liberalised Remittances Scheme (LRS). Under the Budget for 2023-24, the rate of tax collected at source has been revised from 5% for amounts exceeding INR 7 lakhs to 20% flat rate for all remittances except those concerned with education or medical treatment.

Securities Transaction Tax (STT)

When you buy or sell securities, such as U.S. stocks or ETFs, you might be subject to Securities Transaction Tax (STT). This tax is automatically deducted at the time of the transaction and varies depending on the type of security and the transaction. For instance, the tax for intraday orders is 0.025%, which is charged only on the sell transactions. The tax for delivery orders is 0.1% on both the buy and sell stock transactions.

Paying taxes in India as an investor is not just a legal obligation, but it also contributes to the functioning and development of the country. The Indian tax system has mechanisms in place to ensure compliance with tax laws, and failure to meet your tax obligations can result in various penalties, fines, and legal actions.

U.S. stock trading as a way to diversify your portfolio

Trading U.S. stocks can be a great way to diversify your investment portfolio as it involves a variety of stocks from different sectors and industries within the highly-developed U.S. market. Here are several steps that will help you do it:

• Asset allocation. Decide how much of your portfolio you want to allocate to U.S. stocks. This allocation should be based on your risk tolerance and investment goals.
• Diversifying by sector. Allocate your investments across different sectors such as technology, healthcare, consumer goods, finance, and others. Each sector has its own performance drivers, and diversifying across sectors can help reduce the impact of a downtrend in any one of them.
• Diversifying by industry. Within each sector, invest in companies from various industries. For example, within the technology sector, you might consider companies in software, hardware, e-commerce, and semiconductors industries.
• Diversifying by company size. Consider diversifying your portfolio across different market capitalisations. Large-cap, mid-cap, and small-cap stocks can have different risk and growth profiles.
• Using short orders to get the most of it. Consider using short orders—often freely available with CFD brokers—to sell the stocks of companies likely to decline in price and make profits even when whole the markets are falling.

Conclusion

Trading U.S. stocks from India opens up exciting opportunities for investors to potentially benefit from the vibrant U.S. financial markets. However, success in trading requires careful planning, in-depth education, and disciplined approach. By following the steps outlined above, you can navigate the complexities of international trading and work towards achieving your investment goals.

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