Investment portfolio of any investor should comprise various kinds of instruments to maximise the returns and balance the risks at the same time. However, it all depends upon individual choices as many do not like to consider market linked securities. They invest in a fixed income generating investment option or a safer mix of investments keeping the risk minimal. But there are a few others who want to take risk in order to earn out of fluctuations happening in the markets.
Diversification of assets is very important when you decide to invest in different kinds of financial instruments. If you invest in a range of assets classes, risk-reward balance automatically follows. Being an investor who is capable of managing his/her own portfolio, it is quite likely that he/she can efficiently take another step in the direction of international investments as well.
What are the International stock markets and Why should one choose International Investments?
Meaning:The international stock market means all the markets that negotiate stocks from their domestic companies. To buy stocks from Indian markets is a domestic affair but to get stocks from a Japanese company, you should approach the International market. Diversification is the most obvious benefit of International investing. Other than this benefit, the points listed down here make it clear why one should invest in global markets.
- When you invest in foreign markets, different currencies come into play. When the Indian currency loses a fraction of its value but the foreign currency is doing better, you can gain from it. However, there are risks attached with this kind of situation.
- Indian investors can get a chance to invest in developed economies. If one of the countries where the money is invested faces trouble, it can be set off by gains earned in another country where the markets are doing remarkably well. Thus different economies go through different market cycles and by investing internationally the Indian investor can get a chance to invest in an economy that is doing well at the time where our markets are not doing pretty well. There are chances to earn more by doing so as developing economies may turn into stronger ones and generate better returns in future.
- Often the portfolio gets diversified when you invest in foreign stocks. By investing in a less volatile foreign market, you can balance your risk in Indian markets as you are earning higher returns elsewhere.
- There are world renowned companies and you can choose to invest in them if you decide to include international stocks into your portfolio. These companies offer products/services which are well known and an Indian investor getting a chance to invest in their favorite companies may do so out of respect. It feels like a good opportunity when we get a chance to invest in companies which are important and have brighter prospects in future.
- Indian investors get an opportunity to invest in fractional shares. For example US fractional shares. By investing in stocks from different companies you get a wider portfolio and an ownership of a portion of units or stock in foreign companies.
Let us consider the USA, EU and Japanese markets. Our main focus in this article shall be on their evaluation and the strategy to enter these markets.
The United States of America
The USA is one of the largest economies in the world. It has a big consumption market with a diverse culture. It is an alluring destination for many international businesses. It offers diversity which is the main ingredient of the global market.
The top five sectors that attract foreign investment in the USA are: Finance, Depository institutions, Chemical products, Wholesale and Transportation. This market is mainly composed of smaller markets. When it comes to opportunities and investment potential, they have both similarities as well as differences.
- There are approximately 5000 US indexes.
- The Wilshire 5000 includes all the stocks from the US stock market.
- The S&P 500, Dow Jones Industrial Average and Nasdaq Composite are the widely followed indexes in the United States.
- Indexes can be identified by capitalization and sector segregation.
- Indexes play a significant role in the overall analysis of the US equity market.
The S&P 500 Index shows almost 80 percent of the total value of the US stock market. It is a market-weighted index. So if the S&P drops by 10%, the value of the index too drops by 10%.
The Dow Jones Industrial Average is a very well known and the most frequently used index in the world. It being a price-weighted index, includes 30 of the largest and the most prominent companies in the US. The DJIA holds about a quarter of the value of the entire US stock market. A drop in the entire market is usually as a result of a percentage drop in the DJIA. Thus it represents the best blue-chip companies of the US market with a track record of consistent dividends.
The above two are two of the top large-cap indexes. Others are the S&P 100, the Dow Jones US Large-Cap Total Stock Market Index, the MSCI USA Large-Cap Index, and the Russell 1000.
The Nasdaq is known for technology stocks. This includes even those companies which are not based in the US. It is a market capitalization weighted index. It comprises tech oriented stocks like biotech, semiconductors, software and so on. Securities from other sectors like finance, industry, insurance and transportation stocks are also included. It has many speculative companies with small market capitalizations.
The Wilshire 5000 is also known as total stock market index or total market index. The public traded companies with readily available price data are included in it. It is a less referred to index as compared to S&P 500 Index.
Notable Mid-Cap indexes are the S&P Mid-Cap 400, the Russell Midcap the Wilshire US MidCap Index. Smallcaps include the Rusell 2000, S&P 600, the Dow Jones Small-Cap Growth Total Stock Market Index and the Dow Jones Small-Cap Value Total Stock Market Index.
How to invest in US stocks?
The process is very easy and can be done in either of the following ways:
- Direct Investment- You need to open a Demat Account with an Indian broker partnered with a foreign broker.
- Indirect Investment: You can either,
- Buy US ETFs directly either through an Indian or an international broker. You are required to maintain a minimum deposit balance.
- The easiest and the most simple way is to invest in foreign stocks which does not require opening an international trading account or keeping a minimum balance. If you choose to invest in mutual funds then you are free from tracking the right kind of stocks to invest in.
- There are many new age apps launched by startup companies that can help you invest.
If you are not aware of which companies to choose from or which funds to buy, then go for pre-curated portfolios which are exclusive to Stockal known as-Stacks.
A few international brokerage firms like Interactive Brokers, TD Ameritrade, Charles Schwab International Account permit Indian citizens to set up an account in US stocks, mutual funds etc.
The US based brokerage firm Interactive Brokers also has an office in India if you would like to visit. You can resolve your questions and open your overseas trading account.
NYSE stock market opens at 7 p.m IST and closes at 1.30 a.m. IST.
NASDAQ also operates during the same time.
The European Markets
A large number of the bigger European publicly-traded companies have dual listings on other world stock exchanges like the New York Stock Exchange. Many without a dual listing still trade on US Exchange through American Depositary Receipts on UK exchanges through European Depositary Receipts and through Global Depositary Receipts.
The largest stock exchange in Europe is the Euronext with a total market capitalization of euro 5.6 trillion with 1900 listed issuers. It is a pan-European stock exchange based in Amsterdam, Brussels, Dublin, London, Lisbon, Paris, Oslo and Milan. It is the largest center for debt and funds listing in the world. Its product range includes equities, exchange-traded funds, warrants and certificates, bonds, derivatives, commodities and indices.
The EURO STOXX 50 is a major stock market index tracking the performance of 50 Blue-chip companies based in twelve Euro Area countries Austria, Belgium, Finland, France, Germany,Greece, Ireland,Italy, Luxembourg, the Netherlands, Portugal and Spain. The index futures and options on the EURO STOXX 50, traded on Eurex, are among the most liquid products in Europe and the world.
The UK’s FTSE 100, Germany’s DAX 30 and France’s CAC 40 are the three popular European stock market indexes. They are the best for those who want reliable, long term returns without exerting much effort. The markets of these indexes are much smaller and are made up of different types of firms.
Britain’s FTSE 100 Index
It is created by the FTSE group. The 100 most highly capitalized companies in the UK are listed on the London Stock Exchange.
Germany’s DAX 30 Index
It consists of Germany’s 30 largest companies trading on the Frankfurt Stock Exchange.
France’s CAC 40 Index
It is France’s largest index and consists of its 40 largest companies.
London stock exchange opens at 1.30 p.m IST and closes at 10.p.m. IST
The German stock exchange opens at 12.30 p.m and closes at 2.30 a.m.
How to invest in EU markets?
It is easy to trade in an online account if you want to invest or trade in European stocks. Online stock trading is the best way to buy foreign stocks. By depositing funds in euros through international brokers, you can do so. They accept both US dollars as well as UK pound sterling.
Many full-service Indian brokers like ICICI Direct, HDFC Securities,Kotak Sec, Axis Securities etc have a tie up with the foreign brokers. You can invest in global markets using their partner interactive brokers LLC.
Mutual funds or exchange traded funds are another option which conduct their business in the European Union majorly. Or else you can buy shares in an index fund based on European investments in addition to ETF and mutual funds.
ETFs focus on industrials, tech companies, small-mid and large cap equities in these markets.
Buying shares in a mutual fund or ETF means you can take part in the European market without holding any individual stocks. Many European stocks can be purchased through ADRs,EDRs or GDRs. You may choose an international broker based in the EU or someone in India who has access to European stocks. Again a Demat Account will help.
However anything without a strategy could fail in case of forex markets. Know about the trading rules first. Online brokers offer virtual or demo accounts to help you apply your trading strategy in a real market situation.
Social trading platforms can also be of some help. Follow a trader with a proven track record. Just copy what they do if you do not have your own strategy. If you choose a broker, make sure that he/she complies with the EU’sMarkets in Financial Instruments Directive (MiFID) and its recent MiFIR revision providing for a regulatory framework for financial firms that operate in the EU.
Interactive brokers also offer some of the most competitive margin and commission rates in the business. However there is large deposit money required for this purpose and there is an inactivity fee too that’s charged.
The most direct method is direct shares of European markets. It depends a lot on the brokerage firm that you use to carry out trades. If you are a retail investor then check with the institution with which you have your brokerage account. It will help you exchange Indian rupees against European currencies. It will charge a spread and let you know the final execution price and the commission amount.
Saxo bank is an investment bank based in Denmark which allows its clients to trade EU stocks in addition to a wide range of other tradable assets. The bank has an excellent research department and has oversight from top 10 financial regulators. The Netherlands based DEGIRO also offers stock brokerage in many international markets.
Japanese Market
The leading index of Japanese stocks is Nikkei 225 Stock Average. It is a price-weighted index consisting of Japan’s top 225 blue-chip stocks. It can be compared with the Dow Jones of the United States. Sony Corporation, Nissan Motor Company, Canon Inc, Mitsubishi Motor Corp, Softbank Group Corp and Honda Motor Company are a few of them. Tokyo Stock Exchange is a capitalization-weighted index including all the stocks in Tokyo.
The valuation of Nikkei is denominated in Japanese yen.Topix is also an index which is widely followed on the Tokyo Stock Exchange. It includes all the stocks in the TSE. Topix is based on the capitalization weighted method.
TSE/TYO trading hours are in Japan Standard Time corresponding to Greenwich Mean Time GMT+9 hours. Nikkei-Japan Exchange Group trading time opens at 5.30 a.m IST and closes at 11.30 a.m. IST.
Stocks trading in Japan
Automobile and electronics companies are among the most recognizable Japanese stocks. There are other companies participating in food, textiles, chemicals, pharmaceuticals, oil and coal products. Ticker symbols for TSE/TYO listed stocks consist of a 4 digit number identifying them uniquely on the stock exchange. There is a minimum purchase amount per transaction that is decided by the company issuing the stock. You get an option of either entering a “Sashine” order which is just like a limit order. And there is also a “Nariyuki” order which is like a market order where the price of your relatively immediate stock fill is decided by the prevailing market price.
The profit or loss arising on sale of any Japanese stock should be shown on the Japanese annual earning declaration. When you invest in Japanese stocks from outside of Japan, choose an international broker with access to the TSE/TYO or use the ADRs and ETFs listed on the US stock exchanges. Interactive Brokers and Saxo bank both offer stock brokerage services in Japan.
Tax Implications
The FEMA prohibits the investment outside India beyond a certain limit. Under the Liberalised Remittance Scheme, resident individuals can invest abroad by way of acquisition and holding of shares of both listed and unlisted overseas companies and debt instruments. There is a blanket limit of USD 2,50,000 for certain specified purposes only.
For determining the taxability of income, it is important to determine the residential status of the taxpayer.
When an investor is a Resident and Ordinarily Resident in India and hold as a beneficial owner or otherwise, any financial interest in any entity, located outside India, has signing authority in any account located outside India etc would be required to furnish the details of such foregn assets in schedule FA of the applicable Income Tax Return at the time of filing the return of income in India.
Non Residents and Resident but Not Ordinarily Resident are not required to furnish details of the foreign assets in schedule FA.
The transaction details of the Capital Gain and Dividend would be required to be provided by the investor in Schedule CG and Schedule OS respectively at the time of filing of return of income.
There are two types of gains, dividends and capital gains on sale.
1.Dividends-Dividend received from a foreign company is taxable. It is chargeable under the heading “Income from other sources”.The dividends thus received will be included in the total income of the taxpayer and will be charged to tax at the rates applicable to the taxpayer.
2.Capital Gains on sale-The foreign stocks are treated at par with unlisted equity shares in India for the purpose of taxation. If you have held the stocks for more than 24 months LTCG will apply. The gains shall be taxed at 20% after indexation. When the stocks are held for a period less than 24 months, the short term capital gains will be taxed as per slab rate applicable to the investor after adding the capital gains to the current income. The tax rates mentioned in the table below will be enhanced by the applicable rate of surcharge to the investor as well as Health and Education Cess of 4 percent.
Relief from Double taxation: Dividend received from a foreign company gets taxed both in India and and in the home country of the foreign company. If the tax on a foreign company’s dividend has been paid twice in both the countries, then the taxpayer is eligible to claim double taxation relief. It can either be as per the provisions of double taxation avoidance agreement entered into by the Government of India, with the country to which the foreign company belongs, or the taxpayer can claim relief as per section 91 if no such agreement exists.
For example, when it comes to taxation in the USA, there is a flat tax rate of 25%. As there is a tax treaty between the US and India, the rate applicable to Indian investors is much lower as compared to other foreign investors. The balance 75% will be paid as a dividend. The dividend received by the Indian investor in cash or reinvested will be added to the income of the resident and charged at the normal slab rates. The tax withheld in the US can be set off against the tax liability in India.
| Income Type | Taxability in the US | Rate | Taxability in India | Rate | Remarks |
| Dividends | Yes | 25 | Yes | Applicable slab rates | Credit for US taxation available |
| LTCG | No | – | Yes | 20% | Applicable surcharge and fees |
| STCG | No | – | Yes | Applicable slab rates |
Smrutirekha Bhoi