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.
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.
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.
Now let us have a brief look into the characteristics of three of the most commonly followed indices:
The Standard and Poor’s 500 indexes, 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 the 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 of 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 weighing 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).
|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|
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.
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.
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:
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)
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.)
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.
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.)
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 in 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 party companies that are listed in this report.