The US is home to some of the largest stock exchanges in the world in terms of trading volume and market capitalisation. The New York Stock Exchange (NYSE) and the NASDAQ are the major stock exchanges in the country with a market capitalisation of more than 20 trillion USD each.
As with any other stock exchange in the world, these two major US exchanges have their own wide range of stock indices. In fact, there are as many as 5,000 US stock market indices currently in existence. However, not all of them are very significant. A large number of them are mainly sectoral indices.
If you’re planning on tracking the US stock market, you need to keep an eye on the top 5 US stock market indices. Wondering what they are? Here’s a comprehensive guide that will help you understand the stock market dynamics of the United States of America. These indices will also help you understand how to invest in the US stock market from India.
Exploring the Top 5 US Stock Market Indices
The top 5 US stock market indices include the S&P 500, Dow Jones Industrial Average, Nasdaq Composite, Wilshire 5000 and Dow Jones Composite. Let’s take a closer look at each of these US stock market indices to try and understand them better.
1. S&P 500
The S&P 500 is a broad market index created by Standard & Poor’s, a US-based stock market index provider and credit rating agency. The index consists of 500 of the top listed entities in the US stock market in terms of market capitalisation.
The S&P 500 represents about 80% of the value of the entire US stock market, making it one of the most important US stock market indices that investors need to keep an eye on. The index is market capitalisation-weighted and consists of companies across key sectors like consumer staples, finance, information technology, healthcare, industrials and energy, among others.
2. Dow Jones Industrial Average
The Dow Jones Industrial Average, also known as the DJIA, is one of the oldest and the most popular of the US stock market indices. It is frequently used by investors throughout the world to measure the performance of the US market. Unlike other indices, the DJIA is a price-weighted index and consists of the top 30 of the largest and most valuable listed entities in the country.
The Dow Jones Industrial Average represents roughly a quarter of the US stock market. However, since most of its constituents are primarily from the large-cap segment, any change in the index may not accurately reflect the investor sentiment toward mid-cap and small-cap segments.
3. Nasdaq Composite
As the name itself signifies, the Nasdaq Composite is an index created by Nasdaq, the second-largest stock exchange in the world in terms of market capitalisation. Unlike other US stock market indices, the Nasdaq Composite includes all the companies listed in the exchange, even the ones not based in the US.
Since most of the US tech companies are listed on Nasdaq, the index is tech-focused and includes entities from sub-sectors such as software, semiconductors, biotechnology, and more. Investors primarily use the Nasdaq Composite to monitor the performance of the technology industry as a whole.
4. Wilshire 5000
Also known as the ‘total stock market index’ the Wilshire 5000 is one of the few US stock market indices that track all of the companies listed in the US exchanges. Introduced in 1974, the Wilshire 5000 was designed to give investors a comprehensive and detailed overview of the performance of the US stock market as a whole.
However, despite the index offering a detailed overview of the country’s markets, only a certain section of the investors refer to the Wilshire 5000. Most of them prefer the S&P 500 over this index.
5. NYSE Composite
Created by the New York Stock Exchange, the NYSE Composite is an index that tracks all of the stocks listed on the exchange. In addition to stocks, the index’s constituents also include real estate investment trusts (REITs), American depository receipts (ADRs), foreign companies listed on NYSE and tracking stocks.
The NYSE Composite is another one of the US stock market indices that follow the free-float market capitalisation method. Since the index consists of companies across 10 different industries, it offers a good overview of the performance of the US economy from a macro perspective.
How to Invest in the US Stock Market from India?
Now that you’ve got an overview of the top 5 US stock market indices, you might be wondering how to invest in the US stock market from India. Fortunately, many platforms allow resident Indians to invest in US stocks.
All that you need to begin with is to open a US brokerage account via an Indian stockbroking entity that is in a partnership with a US-based stockbroker. Alternatively, you may also directly approach a US stockbroking entity to open a stock trading account.
Once you’ve set up the account, you need to fund it by remitting funds from an Indian bank account to your US brokerage account. Keep in mind that as per the Liberalised Remittance Scheme (LRS), you can only remit funds up to $250,000 in a financial year without the approval of the RBI.
Once your US brokerage account is well-funded, you can then proceed to purchase US stocks directly or invest in a mutual fund or an Exchange Traded Fund (ETF).
Conclusion
You must now be aware of the top 5 US stock market indices and how to invest in the US stock market from India. Investing in foreign stock markets like that of the US has several advantages. Firstly, you get to reduce investment risk through portfolio diversification. And secondly, you get exposure to some of the best tech stocks in the world such as Amazon, Apple, Microsoft and Alphabet.
That said, you also need to account for aspects like taxation, foreign exchange conversion and various other charges like brokerages and bank fees. Therefore, make sure you consider both the advantages and disadvantages before deciding to invest in the US stock market.
