A growing number of Kiwis are investing directly in the US stock market.
Buying stock is now easier than ever – your instant trading device is in your pocket and there is no need to call a sharebroker but how do investors choose which exchange or stock to focus on?
Elly Wan, Head of Business Development at Tiger Brokers New Zealand, says there is a range of global stock exchanges and thousands of listed equities now available to New Zealanders via mobile trading platforms – so the choice is vast, especially with companies like Tiger Brokers New Zealand who currently offer commission-free trading for US Stocks to New Zealanders.
"But while our access to overseas equity markets has never been more straightforward, focusing on a stock exchange, industry or single stock requires some strategic thinking," she says.
As an example, she looks at the relative advantages of the US stock markets of the New York Stock Exchange (NYSE) and NASDAQ versus our local New Zealand Stock Exchange (NZX).
With high profile world-leading companies such as Facebook, Amazon, Apple, Netflix, and Alphabet (Google) – the so-called FAANG stocks – taking centre stage, opportunities on the US markets are enticing, she says. Who wouldn't like to own a share of some of the most successful tech stocks in the past two decades?
"When you compare the FAANG stocks with what is available on the NZX, it is quite reasonable to want to invest in the US sharemarket," says Wan, "and thanks to investment platforms such as the Tiger Brokers' Tiger Trade app, New Zealanders can easily purchase US stocks.
While there is clearly a difference in scale – there are more than 3,500 stocks available on US exchanges compared to around 200 companies and Electronically Traded Funds (ETFs) on the NZX, one of the biggest differences between investing in the US versus New Zealand is access to a diversity of stocks within each industry sector.
This diversity applies across the board – from tech stocks and retail to energy and property: "In New Zealand, there are just a handful of retail stocks – Kathmandu, Michael Hill, The Warehouse Group and Briscoes just about covers the sector.
"As any experienced investor knows, diversification is the key to managing risk. Once an investor gains knowledge of a particular sector or market, they might tend to spread their risk across a range of stocks within that sector rather than purchase a single stock," says Wan.
With a little research investors might decide to purchase stocks from a group of carefully selected companies in a sector or, more simply, buy ETFs which track stocks in a predetermined group, such as US energy stocks within the S&P 500 index.
One of the main reasons for investing in equities is to share in the success of well-managed companies. Here again, there are clear differences between the NZX and the US markets, she says.
In the 11 months to the beginning of December 2020, the S&P NZX 50 (an index of the 50 largest New Zealand companies by market capitalisation) was up 9.72 per cent - a healthy return compared to current bank term deposit rates and considering the impact of Covid-19 on the local economy.
"However, by comparison, the total return from investing in the New York Stock Exchange's S&P 500 Index in the same period was 13.39 per cent and even higher for the NASDAQ 100 – a massive 42 per cent growth," says Wan.
The S&P 500 return is higher than usual but not exceptional. According to global investment bank Goldman Sachs, 10-year stockmarket returns have averaged 9.2 per cent over the past 140 years. Between 2010 and 2020, however, the investing firm notes that the S&P 500 has done slightly better than the historic 10-year average, with an annual average return of 13.6 per cent in the past 10 years.
Wan adds there are downsides to investing in the US market. Active Kiwi traders who like keeping a watch on their US investments, might also need to be night owls. Unlike the NZX, open from 10am to 4.30pm NZT, the US market is open when most of New Zealand is asleep (2am to 10am).
"So people need to factor that in when purchasing on the US markets," she says, "and they also need to keep an eye on exchange rate fluctuations."
A more important factor is the access to information and knowledge – key to any investment, whether it is a property, equities or artwork.
"It's harder to observe US market conditions from here at the bottom of the South Pacific. While there's abundant information and opinion available from stock-picking websites, YouTube and US business media, investors who don't live in the US can be out of the loop on certain activities and market movements."
For example, a consumer and investor living in New Zealand is much more aware of the launch and growth of new brands and companies than a US investor. Likewise, for investors trading on the US markets from other countries, coming to grips with New Zealand market trends and business confidence can be difficult.
However, an increasing number of New Zealanders are now investing in the US market thanks to technological advancements in stock trading. Access to the NASDAQ and New York Stock Exchange is now straightforward, thanks to mobile brokers with fees a fraction of what traditional brokers used to charge.
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