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US Stock Market: How to Invest in the NYSE or NASDAQ

US Stock Market: How to Invest in the NYSE or NASDAQ
Many Australian investors read about the S&P500, the Dow Jones or Russel 2000 on a daily basis in the business news of their local newspaper.
Apr 07, 2016 By Kaivalya Kandarpa Tags: stocks, ASX, Education

There are various stock exchanges in the USA, but the most known exchanges are arguably the New York Stock Exchange (“NYSE”) and the NASDAQ. These exchanges are two of the largest and most prestigious exchanges in the world. The NYSE regularly tops the list in rankings which are based on total market capitalisation or value of shares traded.

Similar to Australia, the overall performance of companies listed on these exchanges is often measured as a group to provide investors with a broad reflection over the overall stock market performance. Some of the most quoted benchmark indices are the S&P500, the Dow Jones Industrial Average (“DJIA”) or the Nasdaq 100. Many Australian investors read about the S&P500, the Dow Jones, Nasdaq or even the Russel 2000 on a daily basis in the business news of their local newspaper.

While all stock exchanges serve the common purpose of facilitating trading securities, they differ in nature. Even though investors purchase shares through their broker, it is important to understand the terminology and distinguish features or classifications of overseas markets. With a vast number of Australian brokers offering access to overseas stock exchanges, the purpose of this research note is to provide Australian investors with a brief overview of the US stock market and how you can invest in overseas equities. 

The New Stock Exchange – The Most Prestigious Stock Market

Established in 1792, the New York Stock Exchange is the oldest, largest and one of the most renowned stock exchanges in the world. This stock exchange has more than 3200 listed companies and is often referred to as the “Big Board”. As opposed to fully automated exchanges such as the ASX, the NYSE uses floor traders to facilitate transactions.  Until 1995, the exchange relied solely on the so called ‘open outcry’ system. The open outcry method is a system where dealers and brokers shout their bids and contracts aloud in order to execute a trade. While more than 50% of the trades are now performed electronically, customers can also send their orders to the floor through the public outcry system.

Some of the most known and largest companies are listed on the NYSE such as JP Morgan Chase and Co., Disney, Nike, General Electric, Johnson and Johnson, Alibaba Group Holdings or Walmart. 

  

Image: The graph above depicts the industry breakdown of the NYSE

The NASDAQ Stock Market

The NASDAQ Stock Market or often simply referred to as “NASDAQ” was founded in 1971 and is currently the second largest stock exchange in the US and the world, by market capitalisation (as at April 2016). Approximately 3100 companies are listed on the index and roughly 2 billion shares are traded on a daily basis. The NASDAQ is an electronic trading exchange and rather a communication system than a physical stock exchange. Orders are being executed by the online execution system or market makers.

Most US tech giants are listed on the Nasdaq such as Microsoft, Apple or Google and thus the technology sector makes up for nearly half of the industry breakdown.

 
 
Image: The graph above illustrates that the technology companies have 43% weighting in the Nasdaq Stock exchange.  

Three US Indices: S&P500, Dow Jones and Russell 2000

Now let us have a brief look into the characteristics of three of the most commonly followed indices:

Standard and Poor’s 500

The Standard and Poor’s 500 index, often referred to as the ‘S&P 500’, is one of the most commonly followed equity indices in the USA, and is generally considered as one of the best representations of the US stock market and (to a certain degree) a bellwether of the country’s economy (read hear about correlation of GDP growth and stock market returns). The S&P 500 index was launched on 4 March 1957 and currently consists of 500 companies with a total market capital of USD 7.8 trillion (as at April 2016).

The S&P 500 comprises of the 500 largest stocks, usually listed on the NYSE and Nasdaq Composite stock exchanges. These stocks are chosen based on specific criteria such as market capitalisation, liquidity or their weighting on the industry. According to Standard and Poor’s, this index captures approximately 80% of the total market capitalisation of the US bourse.

Below is a table comprising of the largest companies by index weight (this data is as at 04/2016. No guarantee is made for the accuracy of this data).

 

Company

Symbol

Sector

Apple Inc.

AAPL

Information Technology

Microsoft Corp

MSFT

Information Technology

Exxon Mobil Corp

XOM

Energy

Johnson & Johnson

JNJ

Health Care

General Electric Co

GE

Industrials

Facebook Inc (A Class)

FB

Information Technology

Berkshire Hathaway (B Class)

BRK.B

Financials

Wells Fargo & Co.

WFC

Financials

Amazon.com Inc

AMZN

Consumer Discretionary

Procter & Gamble

PG

Consumer Staples


 

Image: Industry breakdown of the S&P 500 index shows that Information Technology, Financials and Healthcare are the largest sectors in the US stock market in 2016.

Dow Jones Industrial Average

The Down Jones Industrial Average is one of the oldest gauges in the world, often abbreviated as DJIA, and consists of the 30 largest companies listed in the US. Inclusion is based on a number of factors such as market capitalisation or volume. Along with the S&P 500 index, the DJIA is one of the most widely tracked indices in the world.

Russell 2000

The Russell 2000 is one of the most quoted benchmark indices for small capitalisation or “small-cap” stocks. This index comprises of the smallest 2000 companies listed on the U.S. stock exchanges such as the Nasdaq or the NYSE. 

Image: The graph above shows that the largest number of small and mid-cap companies belong to Financials and IT sectors

What are the advantages of investing in US stocks?

Considering that US stocks have achieved outstanding returns over the long-term, it is often believed that Australian investors could benefit from “international diversification”. An increasing number of brokers offers easy access to international markets as there are a number of advantages for investing in the largest stock market in the world:

  1. Diversification: As we can see from the charts above, the industry breakdown of overseas markets may differ from the local market. Overseas markets can offer exposure to industries that are underrepresented on the ASX. In the US, companies from the information technology sector have a stronger weighting on the overall market, currently around 20%. For example, this sector only has a 0.8% representation on the Australian Securities Exchange (as at April 2016) as investors are left with very little options to invest in IT.

  2. Access to the largest companies in the world: Some of the largest companies in the world are listed on the US stock exchange. To give you an idea of the extend, the market capitalisation of the largest stock on the S&P500, Apple Inc. (AAPL) is 8 times larger than the market cap of Commonwealth Bank of Australia (ASX:CBA). Many of the most known brands are listed in the US such as Disney, Nike, Amazon or Google.

  3. Prestige & Regulation: The companies that are listed on the US exchanges are subject to the regulations of the US Securities and Exchange Commission (SEC). Furthermore, in order for a company to list on the NYSE or the Nasdaq, they are also required to comply with high listing requirements as it is required to comply with the distribution standards of the respective stock exchange. For example: A company’s share price must be above $4 in order to list on these stock exchanges.

What are the risks of investing in US stocks?

Investing in any type of security comes with a certain degree of risk and US stocks are no different. Click here to read our education article about the risks of investing in shares. The potential loss of capital is the greatest risk when it comes to investing, however there are additional risks that need to be considered before investing in the US market (or overseas in general)

  1. Foreign exchange impact: Investing in overseas equities is subject to currency exchange fluctuations. As your holding is in the nominated foreign currency, the value in Australian Dollar (AUD) terms may fluctuate. Unfavourable foreign exchange movements can have a negative impact on one’s net value of foreign investment. For example, if the AUD appreciates against the USD, your foreign investment that you are holding in USD would have declined in AUD terms (if you exchange it back into the local currency) and vice versa.

  2. Less understanding: While many investors may have a fairly good understanding of the Australian economy and Australian listed companies, they are often not able to fully comprehend overseas markets. The underlying fundamentals of US companies or the economy in general is quite different and often investors don’t understand overseas markets as much as their own domestic market. In addition, while these market operate in different time zones, price sensitive announcement may be made while you are asleep which may limit your ability to take action.

  3. Tax Implications with Dividends: Australian residents often enjoy the benefits of franking credits for dividends distributed by ASX listed companies. There may be additional tax implications for overseas holdings that could impact net returns. For tax advice, we recommend you talk to qualified financial planner or accountant.

How to invest in US Stocks?

Nowadays overseas stocks have become increasingly accessible for Australian investors. There are a number of domestic brokers that offer access to some of the largest stock markets in the world, such as the US market.

The first step is to check with your broker if they support trading in international shares. If an investor has an online share-trade account, they can often simply open an international trading account with their respective brokers online.

Find below a list of some of the most common brokers an investor can choose from here in Australia. (Please note that this list is not conclusive as there may be other providers available. Please consult with your financial planner firsty before opening an international share trading account. This list is for information purposes only, Wise-owl does not get any commissions from these links.)  

  • CommSec: Click here to access the website

  • Nabtrade: Click here to access the website

  • ANZ: Click here to access the website

  • Intelligent Financial Markets: Click here to access the website 

  • CMC Markets Stock Broking Limited: Click here to access the website

As soon as your application is approved and your account is funded, you can purchase international stocks, just as you would purchase Australian equities. Make sure you infrom yourself of trading hours, as order can only be executed while the market is open. If you have additional questions, feel free to call one of the advisors here at Wise-owl on 1300 306 308.

Investing in US Exchange Traded Funds (ETFs)

Put simply, an ETF (Exchange-Traded Fund) is a fully tradeable security that tracks the performance of a basket of securities, commodity or other financial instruments. ETF’s are usually issued by a bank or some other financial institution, which offer investors with diversified exposure to commodities, stock indices, currencies, and more.

For example, in the US, one of the most traded ETFs is the SPDR S&P 500 ETF, which tracks the movements of the S&P 500. Investing in ETF’s may increase diversification, as you are able to invest in a range of assets.

Often investing in ETFs is easier than picking individual stocks, hence Australian investors who want to invest in the US, could consider investing in an Exchange traded Fund.

Investors can choose from a variety of ETFs. Listed below are a few ETFs that offer Australian investors with exposure to the US stock market. (Please note that this list is not conclusive as there may be other providers available. This list is for information purposes only, Wise-owl does not get any commissions from these links.)

  • Blackrock: Click here to access the website 

  • ANZ: Click here to access the website 

  • Vanguard: Click here to access the website
     
  • State Street Global Advisors: Click here to access the website

  • BetaShares: Click here to access the website

  • Platinum Asset Management: Click here to access the website

Where do I find Research for US Companies?

The internet makes it possible to find information for any listed US company just as you would find commentary for Australian companies. Sources include the company website, newspapers, online editorials or stock forums. However, the challenge is to filter the advice you are getting. It is easy these days to get advice for everything, but it is not easy to get 'good' or 'well researched' advice.

Since 2015 Wise-owl offers stock tips for international equities as well. We focus on the largest companies on the U.S. and European stock markets with the primary focus on capital growth and dividends.

Members can click here to view our international portfolio and non-members can click here for a free trial in order to receive our international stock picks.

Please note that Wise-Owl does not receive any commissions from third part companies that are listed in this report.

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