US Stock & US ETF Guide

Beginner's guide to investment in US Stocks

A major obstacle for a beginner investor is lack of investment capital, even if he/she can predict the market trend correctly, he/she may not be able to grasp an investment opportunity without having the required minimum investment amount.

To you who are new to investment, investing in US stock can be an option. Unlike HK listed stocks that generally require at least 1 lot (i.e. dozens and thousands of shares) for entry, you can buy only one share of a US listed stock thus lower investment amount to start with. 

Please find below the key information on trading US stocks.

Are you considering buying US stocks? You would have to know the opening time of the US stock market. There is a 12-hour difference between the US and Hong Kong trading hours, and the trading hours in daylight saving are from 9:30 p.m. Hong Kong time to 4:00 a.m. the next day. Wintertime is delayed by one hour, from 10:30 p.m. Hong Kong time to 5:00 a.m. the next day. Buying US stocks could be a good fit if you are a night owl, of course remember don't push yourself too hard.

Most transactions can be conducted online nowadays, the broker’s service fees include brokerage fees, transfer-out fees and others (the fees vary depending on brokers). Fees may also be charged by the relevant US authorities for US stocks trading.

For non-US citizens, disposal of investment in US stocks is not subject to the Capital Gains Tax (CGT), but investors need to pay the dividend tax charged by the US government, which is 30% of the dividend amount. It will be deducted by the bank or broker directly when the dividend is distributed prior to payment to the investors.

Besides, US stock transaction costs also include Securities and Exchange Commission (SEC) fees, settlement fees, trading activity fees and American Depositary Receipt (ADR) fees (the SEC fees and trading activity fees will only be charged when selling US stocks but not buying).

The 3 major US stock indexes are the Dow Jones Industrial Average (Dow), the Nasdaq Composite (Nasdaq), and the S&P 500 (S&P 500). The Dow has been established for over 100 years and is the oldest stock index with 30 constituent stocks which include large American enterprises such as McDonald’s and Microsoft. However, the industry coverage is relatively small.

In contrast, the S&P 500 includes 500 US enterprises. The rating agency Standard & Poor's selects the 500 companies in the index based on market capitalisation and circulation market value, its constituents include Twitter, Starbucks, Netflix, FedEx etc. This index has more diversified industry coverage and can better reflect the performance of the US economy generally.

The Nasdaq includes all the stocks listed on the Nasdaq Stock Exchange (consisted of over 3,600stocks in total[1]) and is also an important indicator of technology stocks. Emerging industries are also included in the constituent stocks, such as telecommunications stocks, Biotech stocks, semiconductor stocks etc.

After learning the fundamentals, you also need to understand the diversity in US stocks and sectors before trading. Powerful enterprises from all over the world are listed in the United States in various ways. For example, TSMC, Nintendo and Samsung are listed in the United States through ADR.

The US stocks are also very diversified in terms of industry sectors covered. Besides the well-known industries such as energy and health care, companies related to high-end technology are also covered, providing investors with more choices of stocks with solid foundation and growth opportunities.

Last but not least, never put all your eggs in one basket. Regarding the US stock market, the US regulatory system is relatively comprehensive with transparent information, but remember all investments involve risks. As a rational and disciplined investor, it is essential to pay attention to the news and have a deeper understanding of the company's business and its structure before trading stocks. It is also important to analyse its financial statements and other relevant information. Furthermore, investors should work on bettering your capital allocation and risk diversification to minimize psychological pressure and investment/monetary losses.

Beginner's guide to investment in US listed ETFs

What is ETF?

Exchange-Traded Fund (ETF) is an open-ended fund listed and traded on the stock exchange. Similar to general/unlisted funds, an ETF invests in a portfolio of stocks, bonds, commodities, currencies and/or other assets and investors would have exposure to such underlying assets through investing in the ETF.

ETFs can be classified into two types, "passive" and "active". A “passive” ETF aims to track the performance of an underlying index/benchmark, and is also called index tracking ETF. For example, a stock index ETF aims to track the performance of a stock index, it generally rises and falls simultaneously with the tracked index. For "active" ETFs,  the fund managers select the financial products to be invested and actively manage the investment portfolio, aiming to achieve its investment objective.

In addition, there are inverse and leveraged ETFs in the market, which are mainly used for hedging. The return for an inverse ETF is inversely correlated with the performance of the tracked financial product(s)/index(es). When the price of the tracked financial product/index rises, the price of the inverse ETF will fall and vice versa. Inverse ETFs are similar to call or put options. For leveraged ETFs, unlike conventional ETFs, the potential gains and losses are both multiplied, and they have to rebalance the portfolio every day. They can be more volatile due to the use of leverage and rebalancing activities.

Here are some details which might help you start trading US listed ETFs.

The trading method of US ETF in the secondary market is the same as US listed stocks, you may trade anytime during the stock market trading period. For US listed ETFs, the smallest trading unit is one share, and fees applicable for trading US ETFs are basically the same as those for trading ordinary US stocks. However, investors should note that an ETF incurs certain fees and charges such as management fee charged by the ETF manager and other administrative costs, which are deducted from the ETF’s assets and the net asset value of the ETF is reduced accordingly.

First, the liquidity and the trading volume of US listed ETFs are high. Second, ETFs contain a basket of stocks, it balances the overall performance and avoids being affected by a single stock. The investor can diversify the investment portfolio at a lower entry fee compared to ordinary stocks.

US ETFs can be roughly divided into large-cap ETFs, small and mid-cap ETFs, and market-wide ETFs.

Table below compares the target of investment and volatility of US ETF of different sizes:

ETF Classification
Target of Investment
Volatility[2]

Large-cap ETF

Stocks with larger market capitalisation size

(over USD 10 billion)[3]

Relatively small

Small and mid-cap ETF

Stocks with smaller market capitalisation size

(USD 300 million – 10 billion)[3]

Relatively large

Market-wide ETF

Large, medium and small stocks, while the proportion of large stocks would be higher

Relatively small

Below are the largest ETFs for each of the 3 major US stock indexes[4]:

  • SPDR Dow Jones Industrial Average ETF (DIA), the underlying index is composed of 30 “blue-chip” US stocks listed on the Dow (Assets Under Management (AUM): USD 26.25B as of 14/07/2022)[5] 
  • S&P 500 ETF (SPY), currently the underlying index has 502 constituent stocks, and this ETF has the largest AUM in the world being USD 342.36B, as of 14/07/2022[6]
  • Nasdaq 100 ETF (QQQ), which tracks the Nasdaq-100 Index comprising 100 largest non-financial companies listed on the Nasdaq Stock Market based on market cap (AUM: USD 161.62B as of 15/07/2022)[7]

To identify a high-quality ETF product and diversify risks, you should consider if it includes a wide tracking range, high liquidity, long-term holding, and no reliance on assets that cannot be replicated. ETFs provide a variety of product options, such as stock ETFs, bond / fixed income ETFs, commodity ETFs, currency ETFs, inverse ETFs[8], leveraged ETFs[8], and sustainable investing concept ETFs.

Investors should be reminded to consider the track record of the fund manager. In addition, investors should understand the key features of the ETF and risks involved, such as tracking errors, trading risks (the ETF share may be traded at a discount or premium to its net asset value). Also, the fluctuation of ETFs is relatively small compared to ordinary stocks.  

Open a securities account at ease

Explore our products

US Securities Trading Service

  • Unlimited free real-time US stocks quotes
  • Online submission of Substitute Form W-8BEN
  • Comprehensive US stock market data
  • US market news with Chinese translation[9]

Hang Seng Invest Express x etnet

  • One-stop solution to trade HK stocks, Stock Connect Securities and US stocks
  • Place your order online with 4 simple steps
  • Effortless synchronisation of traders’ watch list across all Hang Seng online platforms
  • Provide IPO subscription and IPO financing service (not applicable to US securities)[10]

Footnote

Disclaimer

This document is for general information and reference only. This document does not constitute, nor is it intended to be, nor should it be construed as any professional advice or any investment recommendations, or an offer or solicitation to deal in any of the securities or investments mentioned herein. The information contained in this document is based on sources which Hang Seng Bank Limited (“Hang Seng”) believes to be reliable but has not independently verified. No liability or responsibility is accepted by Hang Seng in relation to the use of or reliance on any information contained in this document. Investors must make their own assessment of the relevance, accuracy and adequacy of the information contained in this document and make such independent investigations as they may consider necessary or appropriate for the purpose of such assessment. Hang Seng does not make any representation or recommendation or assessment as to whether or not any of the investment(s) mentioned herein is/are suitable or applicable to any persons and thus shall not be held responsible in this regard. Investors should make investment decision(s) based on his/her own investment objectives, financial situation, investment experience and specific needs etc; and if necessary, should seek independent professional advice before making any investment decision(s).

This document has not been reviewed by the Securities and Futures Commission in Hong Kong or any regulatory authority in Hong Kong.

Remark(s)

  1. Nasdaq.com, as of 15/07/2022
  2. Fidelity.com, as of 15/07/2022 
  3. Nasdaq.com, as of 15/07/2022
  4. ETF.com; Statista Research Department as of 07/07/2022 
  5. Ssga.com, as of 14/07/2022
  6. Ssga.com, as of 14/07/2022
  7. Invesco.com, as of 15/07/2022
  8. Synthetic ETFs do not invest directly in the underlying assets which constitute the index but seek to obtain an exposure to the economic gain / loss in the performance of the index (net of fees and charges) by entering into derivatives contracts with counterparties. Therefore, synthetic ETFs have additional risks when compared with ETFs of other replication strategies and investors should be aware of the risks before making an investment decision.
  9. The translated content is provided by 3rd party information provider with translation software used. The Bank makes no warranty as to the accuracy, reliability or correctness of any translations and accepts no liability in relation thereto.
  10. To borrow or not to borrow? Borrow only if you can repay!