What is Stock market & Foreign Stock Market and how does it works?
A stock market & Foreign Stock Market, also known as a stock exchange, is a venue to trade securities, such as bonds and shares. Sellers of securities are matched with their buyers in a stock market and they trade with each other using rules imposed by the market’s governing authority. For example, the New York Stock Exchange (NYSE) matches the Best Bid Offer (BBO) with the lowest sale price. If there are not enough buyers of the security, then an assigned market maker steps in to make up for the difference and accomplish the sale.
Stock markets began as physical locations where traders gathered buy and sell shares but most trades are now conducted online. Some markets like the National Association of Securities Dealers Automated Quotations (NASDAQ) do not have physical trading floors at all and all transactions occur online. Others, like the NYSE, have a hybrid system in which physical trading comprises a small portion of the market’s overall volume.
Depending on trading volume and economic conditions, stock markets can be bellwethers of the broader economy. For example, the Great Depression began with the stock market crash of 1929. Similarly, major indices at major stock markets plunged during the financial crisis of 2008 and rose to new heights after the Great Recession of 2008, reflecting the American economy’s period of sustained growth.
How are Stock Traded ?
The basic math of a stock trade consists of the difference between the bid and ask prices. After a stock is listed at an exchange, market forces take over. It is traded multiple times in a day. Some investors purchase the stock, or bid for it, at a low price. Other traders sell it, or ask for it, at a high price. The difference between the purchase and sale price is known as a bid-ask spread.
This spread is important for several reasons. First, it is an important source of revenue for market makers who make money off the price difference between these prices. Second, it is an indicator of the liquidity and interest in the stock. The narrower the spread, the more the stock’s liquidity because it means that traders are interested in owning or selling it.
In general, liquid stocks are less susceptible to wild price swings because of the higher number of traders that make up their market. Illiquid shares, on the other hand, are more liable to display steep increases or decreases in their price because a single large transaction has the potential to draw investors into the company or drive them out of it.
History of Stock Market.
Reading about the stock market, you encounter names like the Dow Jones Industrial Average and the S&P 500 Index. These are two of the stock market’s most famous benchmarks, or barometers that try to capture the performance of the whole market and even the whole economy.
Founded in 1896 by Charles Dow and Edward Jones, the Dow is a price-weighted average. That means stocks with higher price-per-share levels influence the index more than those with lower prices. The Dow is made up of 30 large, U.S.-based stocks. It was designed as a proxy for the overall economy.
The Dow’s 12 initial components were mainly industrial companies, such as producers of gas, sugar, tobacco, oil, as well as railroad operators. It has since gone through many changes and now includes technology, healthcare, financial and consumer companies. General Electric was one of the original Dow members. Meanwhile, Procter & Gamble was added in 1932 and remains in the benchmark today.
Meanwhile, the S&P 500 was created in 1923 by Henry Barnum Poor’s company, Poor’s Publishing. It began by tracking 90 stocks in 1926. Standard & Poor’s was founded in 1941, when the company merged with Standard Statistics.
Today, the S&P 500 is a market-cap-weighted index, meaning companies whose market value is larger have a bigger influence. Market value or market cap is calculated by multiplying the price-per-share by the number of shares outstanding. More so than the Dow or other gauges like the Russell 2000 Index, the S&P 500 has become synonymous among investors with the stock market.
What are foreign Stock market?
Stocks of company belonging to a geographical boundary are generally known of, to all the residents of the particular country. The Foreign Stocks however, are the securities of companies located outside one particular nature.
Giant companies which not based out from India are a profitable investment option, just like the blue chip companies of India are considered to be.
However, residing from another nature, the companies are listed in the Foreign Stock Markets, which is an entirely different phenomenon.
Notable companies and the product we use, often grasp our attention, and the idea of investing with them may as well arise.
Participating in foreign stock investment as well is a great way of diversifying and creating a strong portfolio, in terms of healthy and increased returns.
How to invest in Foreign Stock market?
The idea might have been emerged, where the products of the foreign brands you buy may be have attracted your interest to invest in.
Fair enough, for the giant companies they are, but the real challenge is of knowing how to invest in Foreign Stocks.
Making it easy for you, we have incorporated this article, which is directed towards How to Buy Foreign Stocks.
⦁ Choose a broker based in India, but have links with foreign brokers. Among all the reputed and high class performing Indian Stock Brokers have direct links and tie with respective foreign brokers. An overseas trading account of such domain can be opened and operated easily, thereby having the means to invest in foreign stocks.
⦁ There is also a list of foreign brokers, who let Indian Traders invest in their stock markets. An account can be directly opened by them, making it easy to undertake direct investments in foreign exchanges. Some of the highly active brokers, also have their offices in parts of India, making it easy for the investors to visit them, seeking out for clarification of their query.
⦁ Some Indian Mutual funds and ETFs are as well-structured to invest in the foreign markets. So, investors can invest in such funds, where their investment goes directly to the foreign equities.
Why invest in foreign stock market?
There are a host of reasons to Invest in Foreign Stocks. Also, the ease with which one can Buy Foreign Stocks, the other reasons are as follows:
⦁ There are brands we come across everything, we literally have grown up and evolved using the products of such companies. Some of the brands each and everyone would agree with are Apple, Google, Twitter, Facebook, Amazon, and lots of other companies. The products and services they provide are remarkable, and alongside buying their products, owning a part of the company is highly aspired.
⦁ Diversification is all about elimination of risk factors. While we have all the possible ways of efficient diversification in our economy, when a collective factor leads to the downfall of Indian Markets as whole, the risk shall be equally diversified to the as economical factors of one nation does not affect others.
⦁ International markets are the hub of greater investment opportunity. Ones you break past the geographical investment boundaries, you will open new opportunities of earning high returns.
What are good instructions for invest in foreign Stock Market?
- We suggest the best way to Foreign Investment, is the pathway of ETFs and Mutual Funds. ETFs, also known as exchange trade funds, have bunches of international stocks and bonds, creating a common and easy ground to invest in foreign markets.
- This way, diversification would be a factor of investment, alongside the nature of high quality foreign investment. Portfolio would expand and returns would become more definite.
- However, there are a number of options the investors can choose from and they are as follows.
- Investment across different nations is possible through international funds.
- Regional investment is as well facilitated through the Regional Funds, through which one can invest in regions like Europe, Asia, Middle East, etc.
- Country wise investment is facilitated through country funds.
- Sector investment is as well facilitated, where one can invest in sectors like gold, energy etc throughout a vast number of countries.
- ADRs and GDRs
How To open a Demat Account?
Before you get started on the demat account opening procedure, select your broker. This choice could depend on a variety of factors – such as brokerage fees/charges (more on this below), the platform’s / user interface, and its customer service.
In today’s digital world, the way you apply for your account matters. Your broker is the one who’ll help you open a demat account in the easiest way possible. Is it the traditional method involving paper forms? Or the new-age Aadhaar-based paperless online method?
Steps to open a demat account
- The online account opening method
- In today’s digital world, there really shouldn’t be any reason for you to be filling out physical forms when almost the entirety of your information can now be stored digitally. Fortunately, some brokers have the online processing part figured out. Customers can sign up and complete the registration process online. As long as you have an Aadhaar card with your mobile number linked to it, you’re good to go!
- Head to the Upstox ⦁ online demat account opening page.
- Enter your basic details, and click Sign Up.
- Keep scanned copies (i.e. soft copies) of your documents (Aadhaar, PAN, Cancelled Cheque, and your latest bank statement) with you for when you are directed to upload them.
- Enter your Aadhaar details and the OTP you receive on your linked mobile number in order to verify your identity.
- That should be it. Your demat account should now be created.
Is it smart to invest in foreign stock market?
1) Foreign Stocks Can Be Incredibly Beneficial
By ignoring investment opportunities outside of the U.S., you’re missing out on approximately half of the investable developed stock market opportunities in the world. International equities can provide an additional layer of diversification for investors’ profiles and can reduce risk while providing similar or greater returns. While U.S. equities are up, international ones can be down, and vice versa. – Elle Kaplan, LexION Capital.
2) Diversification Always Pays Off
Don’t put all your eggs in one basket. The U.S. market (stocks, bonds, currencies, and all) is one basket, and it is sound portfolio management to spread out the risk. In a domestic boom cycle, you may question this decision, but what goes up must come down. Eventually, the U.S. market will correct more than international ones, and that is when the diversification will pay off. – Atish Davda, EquityZen
3) Returns May Not Outweigh Investment Benefits
U.S. investors will probably do just fine limiting themselves to only investing in U.S. stocks. Adding foreign stocks to their portfolio may have some benefits in terms of diversification and, perhaps, lower volatility, but over the long run, I would be surprised if other major developed economies will grow faster than the United States. That is bound to translate into higher returns eventually. – Gabriel Grego, Quintessential Capital
Strategy before you invest in Foreign stock market.
If you do accept the principle that you diversify a certain percentage of your savings into foreign currencies, here are the steps to follow:
- Define what percentage of your savings you want to hold in what currency or group of currencies. For example, you could hold 40% in US Dollars, 40% in Euros and 20% in Asian and stable Emerging Markets Currencies.
- Identify the following for each of the currencies or group of currencies that you want to keep investments in:
- The stock market index funds that you want to hold when the long-term trend in the stock market for that currency region is up ( trend following).
- The savings account, money market account or short to medium term bond funds that you will park your money in when the long-term trend in the stock market for that currency region is down.
- You invest your savings into the different funds for the different currency regions according to the percentages that you set under “1” and as defined in “2” according to the direction of the long-term trend in the stock market.
If you do not have any substantial holdings in foreign currencies and you start implementing this strategy, my suggestion would be is to implement it in 2 or 3 steps spread out over a few months. You are in that way less dependent on the currency exchange rate of the day.
When the direction of the long-term stock market trend changes for a certain currency region, you move your holdings accordingly from the stock market to the cash/bonds or vice versa.
- Now every 6 months, you rebalance your savings over the different currencies.
- You calculate all your foreign holdings back to the value in your own home currency. Add them all up to calculate the total value of your holdings.
- You compare now the actual percentage of your total holdings that is invested in each currency with the percentage that you set out with.
Over time your actual percentage will probably have changed compared to what you set out with due to differences in the performance of the different markets and changes in the exchange rate.
For example, if you had set out with a division of 40%/40%/20%, this could now have turned into 35%/42%/23%. Note that these changes in percentages do not tell you if the total value of your holdings has gone up or down during the last 6 months. Most of the time it will have gone up; sometimes it has gone down.
- Now you sell and buy the appropriate holdings to re-balance your portfolio back to the original division over the different currencies. For example, sell holdings to bring the 42% and 23% back to 40% and 20% and buy to increase the 35% holdings to 40% of your total.
⦁ You do this only if these orders are in size much bigger than the commissions you have to pay for these trades. Otherwise it does not make sense.
By re-balancing in this way, you systematically buy low and sell high.