Currency risks
While buying stocks in the USA you will need to be handling two currencies - the INR and the US dollar. If you wish to buy a share in the USA, you will first have to remit the share amount in INR from your bank and then convert it into USD before purchasing the stock of the US company.
In a similar manner, when you decide to sell the stock the sale proceeds in USD will have to be converted into INR and then it will be credited to your bank account.
Here you face a substantial currency risk.
If you invest Rs. 3.5 lakh in US stocks when the exchange rate is Rs. 70/USD, you buy 20 shares of Facebook at USD 250 each. When the stock price rises to USD 300, you sell for USD 6000, but due to the exchange rate dropping to Rs. 60/USD, your profit is only Rs. 10,000. If the rate had risen to Rs. 80/USD, your profit would have been Rs. 1.3 lakh.
Country-related risks (PEST factors)
Since you are living in India there is only so much you can understand about the economic, social, political, and other trends that dominate the US. The cumulative influence of all these factors on the economy and stock markets is difficult to predict while we sit in India.
To understand this with an example, every year when the budget is announced we know for a fact that markets will behave in a volatile manner for a few days before finally settling and hence as an investor, you will plan your move accordingly.
However, the same cannot be said for the markets in the USA since they have their norms and trends that come into play. In such a situation it is not possible to predict investor sentiments or market trends which can lead to loss-making investment decisions. Hence Indian investors need to do some thorough research before investing considerable portions of their capital in the US stock market.
Interest rate risks
The USA has always been a country that relies highly on debt. If the interest rates rise in such a scenario then returns from equity or fixed-income instruments can take a hit.
For instance, a company that is already in a lot of debt will find it difficult to take on more debt to carry on its operations in a scenario where interest rates are increasing. This will lead to an increase in its cost of borrowing and also affect the bottom line. This will negatively affect its demand and stock prices.
This higher cost of borrowing will also affect consumers which in turn will lead to a decrease in consumption and affect the sales and profitability of companies, as consumers will spend less.
In this scenario, investors will also re-analyse their investments and strategies and will let go of shares that are sensitive to changes in interest rates. They will be attracted more towards fixed income generating instruments like bonds which further pulls away liquidity from the stock markets.
Liquidity risks
While the USA is the biggest stock market in the world with high trading volumes, it is incorrect to assume that you will always find a buyer for the stocks you have bought since the markets are always liquid.
But more often than not, the shares that you bought earlier might not have any demand in the market.
Hence as a well-informed investor, it is essential to stay informed about the latest developments in the companies you are invested in and monitor the trading volumes of the stocks you hold.
Regulatory risks
Just like the Indian government, the US government too follows different norms and regulations for the stock markets and is governed by regulatory authorities.
Any sudden change in policy or regulation pertaining to a specific sector can affect businesses in that industry and lead to a rise or fall in the prices of shares. Hence you need to be aware and prepared to deal with any such sudden changes.
Taxability risks
Taxation lies in the hands of the government and there can be changes to tax laws of certain sectors if the need arises according to the government. If the industry that you are invested in, comes under this purview it can affect your returns or earnings.
You also need to be aware of taxes like capital gains tax and dividend tax and their implications for a resident of India who invests in the US stock market.
