While the United States could enter into recession and, after that, the whole world, it is clear that the American stock market has established itself as the locomotive of global finance in recent decades. Its iconic indices are posting record returns that are attracting savvy investors. The severe correction of 2022 could be a welcome entry point for buy-and-hold investors with a sufficiently long investment horizon.
Before launching and investing on the American Stock Exchange, it seems essential to us to review the composition of the American market, the main stock market indices, and the different ways for an individual investor to invest in an American stock or be exposed to the American markets.
What are the characteristics of the American Stock Exchange? Which markets and indices are representative of the US stock market? How to invest in the US equity market when you are a French individual? What are the different ways to invest in US stocks?
What are the fees for transactions carried out on the American Stock Exchange? What is the taxation for your investments in the US markets? In this article, you will find everything you need to know about the American stock market and the advantages and disadvantages of five ways to invest in stocks in the United States.
Wall Street: The Emblem of the American Stock Exchange
Wall Street is a street in lower Manhattan where the New York Stock Exchange is located. Its name comes from the wooden wall built in 1635 by Dutch settlers to defend against the English and the Indians.
The term Wall Street is also often used to refer to the New York Stock Exchange (NYSE), to which we will return in this article or even the world of finance in general. It must be said that Wall Street is not only the historic location of many brokerage firms but also some of the largest investment banks in the United States, and as a result, "Wall Street" quickly became a way of designating the community.
The financial sector includes stock exchanges, large banks and brokers, investment companies, and, by extension, large corporations. The interests of these big “Wall Street” companies are sometimes pitted against those of the small and medium-sized businesses on “Main Street."
Finally, Wall Street, in the collective imagination, remains the symbol of the crash of 1929 but also of the vitality of the American economy and well beyond financial power, including its excesses. This is also the title of the famous film by Oliver Stone, retracing the escapades of the fictitious financial genius Gordon Gekko.
USA stock market: what composition of the American stock market?
The US equity market is a vast and mature market that brings together a large number of companies, from very different business sectors and investment styles, with emblematic growth stocks, particularly in tech with the famous GAFAM, but also aristocrats from the dividend like AT&T, ExxonMobil, or Coca-Cola, and value stocks like many companies in the real estate sector, etc.
The New York Stock Exchange: the New York Stock exchange
The New York Stock Exchange, or NYSE, designates the New York Stock Exchange where we find the shares of the largest companies in the country (Coca-Cola, Boeing ). It is the first American and the first global stock market index. Until 2005, the NYSE was a non-profit association. It then became a limited company: the NYSE Group. In 2006, the NYSE Group and Euronext merged to form NYSE-Euronext. NYSE Euronext was acquired by ICE in 2013, which spun off from Euronext by taking it public.
It is usually associated with two of the largest American indices: the Dow Jones Industrial Average, more commonly called the Dow Jones, and the Standard & Poor's 500, also called the S&P 500.
The real NYSE index is, however, the NYSE Composite, which covers all common stocks listed on the New York Stock Exchange, including U.S. certificates of deposit, real estate investment trusts, tracking stocks, and foreign listings.
The Nasdaq, the other New York Stock Exchange
The Nasdaq, an acronym for National Association of Securities Dealers Automated Quotations, is a stock exchange that opened in 1971. The Nasdaq is the second-largest stock market in the United States, by volume traded, behind the New York Stock Exchange.
It is the largest electronic stock market in the world. Located in Times Square in New York, the Nasdaq marketplace belongs to the European-American group Nasdaq. It gave its name to the stock market index that measures the performance of this market.
The Chicago Stock Exchange
Finally, we cannot talk about the American Stock Exchange without mentioning the Chicago Stock Exchange, located in the Loop sector. The second oldest stock exchange in the world, it was founded in 1848, after the Dōjima rice stock exchange, created in 1697. The Chicago Board of Trade (CBOT) is an exchange where agricultural and financial contracts are traded.
In its early days, only raw materials such as wheat, corn, or soy were traded there. The Chicago Stock Exchange, specializing in futures contracts on agricultural commodities, has over time diversified into all types of derivative products. Today, the CBOT offers options and futures contracts on a wide range of products, including gold and silver, US treasury bills and energy, as well as indices and interest rates. interest.
In July 2007, the CBOT merged with the Chicago Mercantile Exchange (CME) to form the CME Group.
The American stock market: the emblematic indices of the American stock market
The Dow Jones, the NYSE benchmark index, is a must for investing in US stocks.
The Dow Jones, which is the benchmark index of the NYSE, is made up of the 30 largest market capitalizations in the country. This stock market index is the best known and the oldest in the world. Its first publication dates back to 1896, making it a way to study the evolution of the economy over more than 120 years.
This is also why it is still published today despite the fact that the Dow Jones index corresponds to a weighting based on the value of the shares that compose it and not on the market capitalization of the companies. This irrelevant method of calculation and its limited composition (only 30 companies) gradually led to its being replaced by the S&P 500 as the representative index of the performance of the American economy.
Among the stocks that make it up, we find, for example, American Express, Boeing, Caterpillar, The Coca-Cola Company, Goldman Sachs, even Nike, Procter & Gamble, Visa, and Walt Disney.
Since 1900, its average annualized return has been around 7%.
Chart of the Dow Jones index for the day
The S&P 500, the benchmark index of American stock markets for investing in the USA stock market
The S&P 500, created on March 4, 1957, is an index based on 500 major companies listed on American stock exchanges. Its name comes from Standard & Poor's financial rating agency, which manages it.
Representative of the American stock market, the S&P 500 has gradually dethroned the Dow Jones as the representative index of the US stock market. It has even been able to establish itself over the decades as the barometer of the world economy since it is made up of a large number of companies, not necessarily American, but which are listed on American markets.
As a result, the S&P 500 is the index most followed by fund managers and financial professionals.
Note: 84.4% of the total capitalization of the S&P 500 comes from the NYSE, 15.5% from the NASDAQ, and 0.1% from the AMEX.
Among the stocks that make it up, we find, for example, Nvidia, Apple, Berkshire Hathaway, JP Morgan Chase & Co, Pfizer, Verizon Communication, Intel Corporation, Alphabet, AT & T, Wells Fargo & Company, Netflix, General Motors Company, etc.
From 1971 to 2021, its average annualized return was around 9.94%.
Today's S&P 500 Index Price Chart
The Nasdaq is the index of the world's largest electronic stock market for investing in US tech stocks.
The NASDAQ, primarily comprised of technology, transportation, and telecom companies, is often considered the benchmark for technology stocks.
However, the Nasdaq is not limited to this single sector of activity since there are also companies in the sectors of industry, banking, transport, or even the biopharmaceutical sector, for example. Remember, however, that these are almost always growth companies with high growth potential.
The Nasdaq, which has retained in its composition most of the emerging technology companies that it welcomed in the 1980s and 1990s, today lists around 6,000 stocks on the NYSE.
Among the actions that compose it, we find, for example, Apple, Amazon, Alphabet, Microsoft, Meta Platforms (ex-Facebook), Netflix, and Tesla, but also Mylan NV, Biomarin Pharmaceuticals, and American Airlines Group.
From 1926 to 2021, the average annualized return of the Nasdaq Composite is around 10.5%.
Alongside the Nasdaq composite, there is the Nasdaq 100, which corresponds to the 100 largest non-financial companies listed on NASDAQ.
Invest in US stocks directly.
First, it is possible to invest in American companies listed on the stock exchange directly via live securities. This consists of buying shares of American companies. You will be able to carry out the stock-picking yourself and select the shares of companies that interest you and hold them directly within your stock market portfolio.
The choice will be very wide. Before choosing a broker to invest in American equities, find out all you can about the securities actually available at a particular stockbroker. It's better to open a brokerage account with a broker that gives you access to all the stocks you plan to trade if you want to invest in a very specific US stock.
The easiest way when you want to invest in a live American action is to place this security in an ordinary securities account (CTO), an envelope that you can very easily open to any stockbroker. If you do not already have one.
Some insurers also offer a few US securities through the unit-linked support of their life insurance contracts. However, the choice will be much narrower. But it may be sufficient if you are targeting only a few of the best-known American stocks, such as Tesla, Apple, or Amazon, for example.
Remember that live US equity securities cannot be held on a PEA for advantageous taxation, for which only the securities of companies whose head office is located in the EU are eligible.
Finally, the choice to invest in American equities via the holding of live securities requires significant capital. Indeed, given the sometimes extremely high valuations of US equities, building a portfolio of US equities that respects the basic rules of diversification requires significant initial capital.
For example, if you want to invest in American Apple stock, you will have to pay around mid-June 2022, around $132 for a Microsoft share and around $248 for a Tesla share. A Tesla share costs around $650!
US regulations for listed companies
Like European companies, US-listed companies are required to provide investors with the latest information about their activities and earnings. As is the case for European companies, the best way to obtain this information is to consult it directly on the company's website in the “Investor Relations” section. Reports can be quarterly or annual.
As the AMF does in France, the SEC monitors American companies very closely and does not fail to sanction insider trading with very heavy fines. The American regulator is known for its severity in the number of fines, which can sometimes amount to several hundred million.
Investing in US stocks via an ETF
It is also possible to invest in the American market via an ETF or tracker. These are passively managed funds that replicate the performance of an index. In this case, it will either be an American stock market index (S&P 500, Nasdaq 100, Dow Jones, etc.).
This type of investment will allow you to have a diversified portfolio (at least in cash) at a lower cost. Not only is the price of an ETF on a stock market index much less expensive than the amount obtained by buying all the securities that make it up, but in addition, you will only have to place one stock market order (and therefore pay for a single stock market order).
In addition, some ETFs, including US stock indices, can be housed in a PEA. They are even the best way to invest outside Europe by benefiting from the advantageous taxation of the PEA, which, it should be remembered, after 5 years of holding the plan, allows its holder to be exempt from tax on capital gains (the social contributions remain due, however).
Investing in the US market via ETFs does not, however, allow you to carry out your own stock picking and only target the stocks identified by the investor as particularly interesting.
Investing in US stocks with UCITS
Investing in the US market can also be done by means other than live securities and ETFs. For the French private investor, it will indeed be possible to invest in US equities via a managed UCITS if he does not wish to choose his own securities while trusting the expertise of a manager.
Be careful with this type of product to evaluate the performance of the fund according to its benchmark index over the last few years, but also its volatility, in particular the max drawdown, always to be compared to the benchmark index, as well as the fees charged.
While in theory, delegating one's investment in the American stock market to experts via the use of actively managed UCITS may seem like a good idea, don't forget that in reality, very few fund managers manage to outperform their benchmark over time. reference. And the fund's performance is also eaten away by fees, which are much higher than those posted by ETFs, for example.
Investing in split stocks in US securities
Split shares, which consist of buying only one share, are a particularly advantageous way of investing in the US market for investors who wish to carry out their own stock picking but do not have significant capital to build a diversified stock portfolio. Thanks to this system, the investor is exposed to the value in question but with a lower entry ticket.
For example, an investor can buy 1/10 of an Alphabet share and thus pay approximately 223 dollars versus 2,230 dollars for a share of the Google holding in its entirety. Note that if the company pays dividends, the investor will be able to receive the share of dividends corresponding to the number of shares owned. Thus, if you own 1/10 of a share, you will receive 1/10 of the dividend.
Beware, however, that few brokers offer investment in split shares which, to date, remains in France a prerogative of neo-online brokers. So make sure that the financial intermediary you are considering offers this solution.
Also note that on paper at least, this type of investment leads to a multiplication of brokerage fees. Indeed, to own a share acquired by a tenth, you will have to carry out 10 transactions (and therefore pay 10 purchase transactions in brokerage fees).
So, is investing in fractional stocks a bad idea? In reality, the new generation of stock exchange brokers who offer it are not very greedy in terms of fees or even offer 0% commission offers. Among the stock brokers that offer split stock investing, we can mention Trade Republic, eToro, or Trading 212.
Investing in US stocks with derivatives
To position yourself in the American market, it is also possible to opt for derivatives, especially when you want to implement sophisticated investment strategies. It will thus be possible to anticipate a rise or fall in prices as well as to take advantage of the leverage effect, for example, with stock market products such as turbos, warrants, or certificates, but also via derivatives such as options.
Please note that these products are reserved for experienced traders because they can lead to a very rapid loss of capital, sometimes greater than the amount initially invested.
American stock market: How to invest in American stocks in practice
Open a stock exchange account and buy financial products.
As with any investment in an asset, to position yourself in the US market, you will need to open a brokerage account with a stockbroker or a bank. You can store your securities in a securities account or, for certain assets, in a PEA. The securities account will make it possible to invest in all the possible solutions for investing in the American market: live securities and split shares, ETFs, actively managed UCITS, or even derivatives.
The PEA, which includes restrictions in terms of securities, will allow positioning in the American market only through certain ETFs or UCITS.
In all cases, the selection of securities, placing of orders, and monitoring of your portfolio will be identical to what you are used to doing for your stock market investments in the French or European markets.
Wall Street hours of operation
However, there is a particularity to take into account: the opening hours of the American Stock Exchange, which, of course, are different from those of the European stock exchanges. Thus, trading on the NYSE takes place from Monday to Friday between 9:30 a.m. and 4 p.m. (local time), which corresponds to Paris time, when the US markets open between 3:30 p.m. and 10 p.m. in the summertime and between 2:30 p.m. and 9 p.m. in the wintertime.
Seeking Alpha
Seeking Alpha is a reference site for American investors with 17 million visitors per month. It provides Internet users with numerous analyses from more than 500 contributors. Sections dedicated to dividends and ETFs offer very specific investment ideas.
MarketWatch
An essential site for US stock market news, MarketWatch is a subsidiary of the DowJones group, offering access to market data on US stocks as well as many tools such as stock screeners, an IPO calendar, an earnings calendar, etc.
MarketWatch also organizes stock market games with virtual money with a community aspect. It is the Virtual Stock Exchange.
CNBC
The American equivalent of BFM Business, CNBC, is not only a financial news TV channel but also a well-known information site for the latest news on the American economy.
American stock market: what costs for my investments?
Be careful to keep in mind the differences in fees that may exist between investing on the European Stock Exchange and investing on the American Stock Exchange. Indeed, transactions in US securities will often be more expensive than transactions on Euronext Paris. But it all depends on the offer from your stockbroker. If you plan to invest regularly in the American market, perhaps this is a point that should be taken into account when choosing your broker.
When it comes to split stocks, most online brokers won't charge more for US stocks than European stocks. Some players, such as Trade Republic or Scalable Capital, offer investments in fractional shares without any transaction fees via a programed investment plan, which allows you to invest a sum defined in advance every month in the ETFs or shares of your choice.
The fees on ETFs are often the same whether they are ETFs allowing you to invest in a European or US stock market index.
Remember that if you invest in the US market via PEA-eligible ETFs. Regardless of your stock broker, the PEA fee will be capped at 0.50% per order on the internet.
It should also be remembered that in the case of stock market products (such as ETFs, for example), the costs are integrated into the price. To find out the amount of these fees, you should consult the KIID (Key Investor Information Document).
Finally, derivative products may have higher or lower spreads, which are not necessarily very easy to assess.
Foreign exchange risk: A cost to be taken into account for its investments in the US stock market.
Another possible cost to take into account when investing in the American stock market is the exchange rate risk.
Foreign exchange risk corresponds to the risk of loss associated with fluctuations in the price of currencies (e.g., EUR vs USD).
EUR/USD rate from 2002 to 2022
The loss can materialize as a reduction in the performance of the action if the value of the action is rising, or an increase in the loss if the action is falling. We are talking about exchange risk and not about an exchange cost because this risk factor can result in a gain as well as a loss.
For example, French investors who invested in American equities in mid-2008, when the EUR against the USD was at its highest level in 20 years, largely benefited from the fall in the value of the euro within the framework of their investments in US dollars. More recently, French investors have been able to benefit from an outperformance of almost 20% since the start of 2021 by investing in American markets.
Conversely, investors who bought US stocks before 2003 suffered large exchange losses until 2008 (60%) and are still not positive regarding the exchange rate.
Buying US stocks indirectly corresponds to buying US dollars. Professional managers use stock market products such as options to hedge currency risk and try to neutralize it as best they can.
To conclude, there are ETFs offering exposure to US markets with hedged currency risk. This is the case, for example, when:
Amundi Nasdaq 100 UCITS ETF Daily Hedged EUR
BNP Paribas Easy S&P 500 UCITS ETF EUR Hedged
US equities: What is the taxation for my investments in the US market?
With regard to capital gains, you will be taxed for any action in your securities account. Remember that capital gains within a securities account are subject to the choice of flat tax at 30% or the scale of income tax + social deduction if this is more advantageous for you.
With regard to dividends, the American tax authorities will deduct at source 15% of the number of dividends paid, and you will pay in France either the flat tax of 30% or social security contributions + income tax according to the scale, knowing that in this case, you benefit from a 40% reduction on the number of dividends received.
Also note that due to the tax treaty between France and the United States, which avoids double taxation, the US withholding tax entitles you to a tax credit in year N+1.
Disclaimer
All of our information is, by nature, generic. They do not take into account your personal situation and do not in any way constitute personalized recommendations with a view to carrying out transactions and cannot be assimilated to a financial investment advisory service nor to any incentive to buy or sell instruments.
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