What is US Stock Market? How does it work?

The US stock market, a complex yet dynamic system, serves as a vital engine for the American economy. It facilitates the flow of capital from investors to businesses, fuels growth, innovation, and job creation. But how exactly the US stock market works?

Companies Seeking Capital

At the heart of the system lie companies seeking to raise funds. Established businesses often require significant capital for expansion, product development, or acquisitions. Through a process called an Initial Public Offering (IPO), they offer shares of ownership in the company to the public. This essentially means selling a piece of the company, represented by a share, to investors in exchange for the capital they contribute.

Stock Exchanges: Where Buyers and Sellers Meet

Once a company goes public, its shares are traded on stock exchanges. These are electronic marketplaces where investors can buy and sell shares. The two most prominent US exchanges are the New York Stock Exchange (NYSE) and the Nasdaq Stock Market. Unlike physical trading floors of the past, these exchanges operate electronically, efficiently matching buy and sell orders submitted by investors.

How is the US Stock Market Regulated?

The US stock market is subject to a multi-layered regulatory framework designed to protect investors, maintain fair and orderly markets, and facilitate capital formation.

The Securities and Exchange Commission (SEC):

Established in 1934, the SEC is the principal US government agency responsible for overseeing the securities markets and protecting investors. It enforces federal securities laws, sets industry standards, and conducts investigations into potential market misconduct.

How to invest in the US stock market from India?

There are two major ways to invest in US stock market from India

1. Direct investment in stocks.
2. Indirect investment in stocks via mutual funds or ETFs. 

1. Direct Investments

a. Opening an overseas trading account with a domestic broker

Many Indian brokers have tie-ups with international brokers. They act as an intermediary and trade funds on your behalf by opening an overseas trading account for you. You will need certain set of documents for opening such accounts (we will discuss this in later blogs).

b. Opening an overseas trading account with an international broker

You can also open an overseas trading account directly with international broker with a presence in India. For example, Charles Schwab, Ameritrade, Interactive Brokers, etc. can help you here. Please ensure that you understand the fees and charges before opening the account.

So, conduct your research properly before you pick the best broker to invest in US stocks.

2. Indirect Investments

a. Mutual Funds

You can invest in Mutual Funds that have invested their funds in the US stock markets. So by investing in these mutual funds you get exposure to the US markets without having to go through the hassle of opening an account for trading.

b. Exchange Traded Funds

You can also gain exposure to US stocks by investing in ETFs. You can purchase US ETFs directly via a domestic or international broker or purchase an Indian ETF of international indices.

Reasons to invest in US Stock Market

Here's a nice reel that gives you the reasons to invest in US Stock Market

Factors affecting stock prices

Several factors influence stock prices, making the market dynamic and ever-changing.

• Company Performance: A company's financial health, future projections, and management decisions significantly impact investor confidence and, consequently, its stock price.
• Industry Trends: Overall performance within a particular sector, such as technology or healthcare, can influence the stock prices of companies within that industry.
• Interest Rates: Changes in interest rates set by the Federal Reserve can affect investor behavior. When interest rates rise, investors might seek alternative investment options, potentially leading to stock price declines.
• Investor Sentiment: Overall investor confidence and risk tolerance play a crucial role. Positive economic news or strong company earnings reports can boost market sentiment, driving stock prices up. Conversely, negative news or economic downturns might trigger investor fear, leading to sell-offs and falling prices.

Conclusion

Understanding the US stock market provides valuable insight into how businesses raise capital and how investors participate in their growth. This complex system, fueled by supply and demand, plays a critical role in shaping the American economy and offering potential opportunities for those willing to navigate its dynamic landscape.

FAQs

Here are answers to some of the frequently asked questions -

1. Is it good to invest in US stock?

Yes, investing in the US stock market may be a good idea if you are planning to diversify your portfolio and include international stocks.

• Historically Strong Returns: The US stock market has a long history of delivering positive returns over the long term. While past performance doesn't guarantee future results, it suggests the potential for wealth creation.
• Diversification: Investing in US stocks can help diversify your portfolio beyond Indian markets, potentially mitigating risks associated with a single economy. US companies often represent global leaders in various sectors, offering exposure to diverse industries.
• Access to Innovation: The US is a hub for innovation, with many leading technology and growth companies listed on US exchanges. Investing in US stocks can provide exposure to these potentially high-growth businesses.

‍2. When should I buy US stocks?

Unfortunately, there's no perfect time to buy US stocks, and anyone who claims to predict the market with certainty is likely misleading you. The stock market is inherently volatile, and prices fluctuate based on various factors. However, there are some strategies and considerations that can help you make informed decisions:

Long-Term Approach: The US stock market has historically delivered positive returns over extended periods. Focus on building wealth over a long-term horizon (ideally 5-10 years or more) to potentially ride out market downturns and benefit from potential long-term growth.

Dollar-Cost Averaging (DCA): This strategy involves investing a fixed amount of money at regular intervals (e.g., monthly) regardless of the stock price. This approach averages out the cost per share over time, potentially mitigating the risk of buying at a peak.

Value Investing: This strategy focuses on buying stocks of companies that appear to be undervalued based on their fundamentals like financials and future prospects. Thorough research and understanding of a company's true value are crucial for this approach.

3. What is the best way to invest in US stocks?

You can either choose to invest in these stocks directly by opening an overseas trading account with a domestic or foreign broker, or you can invest in US stocks indirectly via mutual funds or Exchange Traded Funds (ETFs). 

4. When does the US stock market open?

The regular trading hours for the US stock market, which includes major exchanges like the New York Stock Exchange (NYSE) and the Nasdaq Stock Market, are:

• Days: Monday through Friday (except for holidays)
• Time: 9:30 am Eastern Time (ET) to 4:00 pm ET

It's important to note that some exceptions exist:

• Early Closure: On certain holidays like Christmas Eve, trading might end earlier, typically around 1:00 pm ET.
• Pre-Market and After-Hours Trading: While the main trading session occurs within these regular hours, some limited electronic trading activity can happen before the market opens (pre-market) or after it closes (after-hours). However, these options are not available through all brokers and might involve different regulations.

5. How big is the US stock market?

New York Stock Exchange is the world's largest exchange, with an equity market capitalization of nearly 25 trillion U.S. dollars. The following three exchanges are the NASDAQ, the Shanghai Stock Exchange, and the Euronext.