Understanding US Stock Market: Indices, Regulators & Market Participants

Are you an Indian investor looking to diversify your portfolio with U.S. stocks but feeling uncertain about how the U.S. stock market works? The idea of investing in a foreign market can be intimidating, especially when you’re unfamiliar with the dynamics and intricacies that come with it.

However, don’t let that deter you. With the right guidance and tools, you can confidently start your journey into the U.S. stock market. Understanding the basics, such as how the market works, regulators, and the indices, will help you navigate this new investment landscape.

The United States: A Financial Powerhouse

The United States stands as the world’s largest economy, a position that is reinforced by its dominant financial markets. The sheer size and liquidity of U.S. financial markets are unmatched globally. U.S. equities, in particular, hold an overwhelming share of the global market. When evaluating the U.S. share market index alongside the MSCI All Country World index, U.S. stocks represent nearly 60% of the entire index. This 

dominant presence makes U.S. stocks and markets indispensable to global financial systems. Consequently, financial markets around the world closely monitor U.S. market movements, as these often set the tone for global stock trends.

The U.S. Share Market: An Economic Indicator

The U.S. stock market is more than just a trading venue; it is a critical barometer of the country’s economic health. The performance of the U.S. stock market is often reflective of the broader economic conditions in the United States. This market offers a platform for investors to buy and sell both American and international stocks, and the fluctuations in stock prices provide insights into the economic sentiment of the country. The New York Stock Exchange (NYSE), founded in 1792, quickly rose to prominence and remains the most significant stock exchange in the U.S. Today, other exchanges, such as the Nasdaq and the American Stock Exchange, contribute to the diversity and depth of investment opportunities available in the American markets.

Key U.S. Stock Market Indices

In navigating the U.S. stock market, understanding the key indices is crucial. Stock indices serve as benchmarks that reflect the performance of a selected group of stocks, providing investors with a snapshot of market trends. The U.S. financial markets are tracked using several main stock indices, the most recognized of which include:

• S&P 500: This index, weighted by market capitalization, consists of 500 large-cap U.S. companies from various sectors. The S&P 500 is often favored by investors as a more comprehensive representation of the market due to its inclusion of 500 stocks, compared to the Dow Jones Industrial Average’s (DJIA) 30 stocks. The focus on market capitalization also provides a more accurate measure of a company’s value than merely considering its stock price.
• Dow Jones Industrial Average (DJIA): As the oldest index in the world, the DJIA holds significant historical and cultural importance. Comprising 30 blue-chip companies across various sectors, this price-weighted index is often used as a general indicator of the U.S. stock market and the overall economy.
• Russell 2000: This index includes 2,000 small-cap U.S. companies and is also weighted by market capitalization. It serves as a barometer for the performance of smaller, more domestically focused firms.
• Nasdaq Composite: This market-capitalization-weighted index is heavily populated by technology and growth-oriented companies, comprising over 3,000 stocks listed on the Nasdaq exchange. The Nasdaq 100, a subset of this index, focuses on the 100 largest non-financial companies.

Global Significance of the U.S. Stock Market

While it is easy to track the U.S. market through these indices, one might question whether the U.S. stock market mirrors global financial conditions. Traditionally, the U.S. stock market has been seen as domestically driven, particularly the S&P 500, which has been viewed as a reflection of the American economy’s strength. However, in recent years, this perspective has shifted. The S&P 500 has increasingly taken on an international character as U.S. companies grow more reliant on foreign revenues for expansion. This shift means that U.S. stock indices are now more closely aligned with global equities, reflecting the interconnected nature of the world’s economies.

Today, the U.S. stock market is entirely digitized, making it possible for investors around the world to trade stocks from the comfort of their homes. Moreover, it is now feasible for Indian investors to invest in U.S. stocks from India. This can be done by opening an overseas trading account with a domestic or foreign broker. In India, Vested offers investing in US stocks from India, you just need to create an account, complete your KYC and you can invest in the global giants directly.

How the U.S. Stock Market Functions

Trading in the U.S. stock market primarily takes place on two major exchanges: the New York Stock Exchange (NYSE) and the Nasdaq. The NYSE is the world’s largest equity stock exchange, while the Nasdaq is known for listing global technology leaders such as Apple and Google. These exchanges are home to over 5,000 U.S. stock market indices, with the S&P 500, Nasdaq Composite, and DJIA being the most prominent.

Regulation of the U.S. Stock Market

Several different authorities regulate the U.S. stock market, with the Securities and Exchange Commission (SEC) being the primary regulator. The SEC was established in 1934 to enforce federal securities laws, regulate the securities industry, and protect investors. The agency aims to ensure transparency, fairness, and efficiency in the markets, shielding investors from fraud and other abuses.

Beyond the SEC, the Financial Industry Regulatory Authority (FINRA), a private not-for-profit organization authorized by the government, plays a significant role in regulating brokers and brokerage firms. FINRA was established in 2007 to oversee the activities of broker-dealers and ensure compliance with securities laws. It has over 4,750 members and approximately 634,000 registered representatives, all working to maintain the integrity of U.S. financial markets.

Another crucial regulator is the Federal Reserve Board (FRB), one of the most prominent regulatory bodies in the world. The FRB, often referred to as the “Fed,” plays a vital role in regulating the flow of money, liquidity, capital, and credit conditions within the U.S. economy. It uses open market operations, such as the buying and selling of U.S. Treasury and federal agency securities, to execute monetary policy and influence the federal funds rate.

The Office of the Comptroller of the Currency (OCC), established by the National Currency Act of 1863, is one of the oldest federal institutions in the U.S. The OCC supervises and regulates national banks and federal savings associations, ensuring they operate safely and soundly. This oversight helps maintain the overall health of the U.S. banking system.

Market Participants

The SEC also regulates various market participants to maintain standards for fair, orderly, and efficient markets. These participants include:

• Broker-Dealers: They handle trades between buyers and sellers of securities, charging fees for their services.
• Clearing Agencies: These are self-regulatory organizations responsible for comparing, clearing, and settling trades. They include clearing corporations like the National Securities Clearing Corporation (NSCC) and depositories like The Depository Trust Company (DTC).
• Credit Rating Agencies: These companies provide opinions on the creditworthiness of companies or securities, indicating credit quality through ratings.
• Alternative Trading Systems (ATS): These are trading systems that meet the definition of an “exchange” but operate under specific exemptions.
• Investment Advisers: These are firms or individuals that provide investment advice or issue reports on securities for compensation.
• Securities Exchanges: Markets where securities are bought and sold, with 15 exchanges registered with the SEC, including NYSE Euronext and NASDAQ.
• Self-Regulatory Organizations (SROs): Manage industry conduct through rules and discipline members. Notable SROs include FINRA and the Municipal Securities Rulemaking Board (MSRB).
• Transfer Agents: Record changes in security ownership, maintain security holder records, and distribute dividends.

Investing in the U.S. Stock Market from India

Indian investors can access the U.S. stock market through two main avenues: direct investment via an overseas trading account or indirect investment through mutual funds or Exchange-Traded Funds (ETFs).

Direct Investment:

To directly invest in U.S. stocks, an investor can open an overseas trading account with a broker. This option allows for direct participation in the U.S. market. Platforms like Vested facilitate fractional investing, enabling investors to purchase portions of shares, thus making it possible to invest with minimal capital.

Indirect Investment:

Investors can also opt to invest indirectly through mutual funds or ETFs that focus on international markets, including the U.S. While this method may seem less daunting, it comes with potential drawbacks such as higher fees, tax inefficiency, and management issues.

Regulatory Framework:

Indian residents can invest in U.S. stocks under the Liberalised Remittance Scheme (LRS) introduced by the Reserve Bank of India (RBI). The LRS permits residents to remit up to $250,000 per financial year for investments abroad, subject to certain conditions.

Conclusion

Investing in U.S. stocks offers an opportunity to diversify your portfolio and tap into the growth of some of the world’s most renowned companies. Whether choosing direct investment or mutual funds, understanding the U.S. market’s key indices, regulatory environment, and investment avenues is essential for making informed decisions. With global market integration on the rise, the U.S. stock market continues to play a pivotal role in the global economy, offering investors opportunities for growth and diversification.

As with any investment, thorough research and a clear understanding of market dynamics are critical before committing capital. The U.S. stock market, with its vast range of opportunities, is accessible to investors worldwide, including those in India. Through digital platforms and regulatory frameworks like the LRS, Indian investors can now seamlessly participate in the U.S. market, broadening their investment horizons and potentially enhancing their financial portfolios.