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Top 10 Reasons for Trading the US Equity Market


Top 10 Reasons for Trading the US Equity Market

The US equity market is not just large – it is massive. It is the largest stock market in the world with the most diverse range of listed companies anywhere - and it continues to be the most exciting investment market in the world for the private investor.

A growing number of UK investors have realised that the US equity market is not just highly accessible - despite its geographic distance - but is also highly desirable because of this distance. Many of these investors now actively prefer to trade US equities over the UK market.

Whilst many of their reasons for preferring the US markets are applicable across all classes of investment, there are also a number that are quite unique to spread betting and CFDs. These are our top 10 reasons for trading the US markets:

 

1. Size & Diversity

The Dow Jones Wilshire 5000 index is the most comprehensive index available for US equities. It represents all the US equities with readily available prices (i.e. it excludes bulletin board stocks and secondary issues) and it has a market capitalisation of $13,237.7 billion.

This compares with the FTSE 350, which covers 97% of the UK equity market and has a capitalisation of just £1,242.6 billion (approximately $2,300 billion).

And whilst the DJ Wilshire 5,000 is made up of approximately 5,000 component stocks (what a surprise!), the FTSE All Share contains just 700 with a further 1,000 listed on AIM.

So not only are there more listed companies to choose from in the US, but there are also far more global giants to invest in. Where else could you find such companies as Microsoft and Google?

 

2. Size & Liquidity

Another consequence of the sheer size of the US equity market is liquidity. Liquidity is characterised by ‘tightness’ and ‘depth’. A more liquid market will usually show a tighter bid/ offer spread, whilst the depth of a market relates to its ability to absorb large trades without a significant impact on the market price.

Large companies in the UK, such as Vodafone or BT, typically trade on a 0.25 bid/ offer spread, whilst large companies in the US, such as Microsoft and General Electric trade on a 0.01 spread or without a visible spread at all.

The other consequences of this liquidity are that there are fewer delays in the execution of a trade and that bigger trades don’t cause significant fluctuations in the market price.

 

3. Diversification of economic risk

Despite the close ties between the UK and US economies and the obvious similarities in the performance of the two stock markets, there are also marked differences which can justify the diversification of trading activity across the pond.

For example, the Enron scandal threw up great waves of uncertainty in corporate America, but hardly a ripple in the UK. Equally, interest rate changes and fluctuations in f/x rates can boost imports/ exports on one side of the Atlantic but have quite the opposite effect on the other.

 

4. Diversification of sector risk

Another reason for looking at the US equity markets might be to diversify into different industry sectors.

For example, there is no UK equivalent to the US listed Yahoo!, Google and Ask Jeeves in the Internet sector. And for those looking to take advantage of the recent hikes in the gold price, there is little in the UK to match Newmont Mining, Barrick Gold or even the simple gold tracker funds in the US.

 

5. Market opening times

Most of us have no choice but to work standard office hours, 9:00 – 5:00, and little opportunity to pursue our own interests during this time. The US equity markets are attractive for so many of us for precisely this reason – that they are still open long after we have finished work and gone home at the end of the day.

The US markets open between 9:30 am – 4:00 pm, which equates to 2:30 pm – 9:00 pm UK time. Whilst trading through limit orders is still an option, it just doesn’t give the control or excitement of trading a live market.

 

6. Government Tax

For those buying equities, the UK government charges 0.5% stamp duty on all share purchases (equivalent to £50 on a £10k trade), whilst there is no stamp duty on purchases of US equities.

Obviously this is not applicable for spread betters - who instead receive the added benefit of no capital gains tax on any profits.

 

7. Currency Fluctuations

Whilst the positive and negative fluctuations in the US Dollar will generally balance out for a frequent trader, a canny investor can take advantage of these highs and lows to generate a little extra income on his trading funds.

The recent strengthening of the Dollar against the British Pound would give a trader an extra 5% return on any funds being brought back into the UK after 3 months’ investment in the US.

Of course for spread betting there is no currency risk and bets are placed at pounds per point.

 

8. Freedom of information

Again, the sheer size of the US equity market and the number of players competing for the attentions of the private investor has led to a proliferation of trading and investment information – and much of it is available free to the private investor.

There is a huge range of information covering streaming prices, technical analysis, trading signals, etc, that dwarfs the UK industry. Even the NASDAQ website offers access to price streaming products plus an excellent free stock screening tool for US equities.

 

9. Transparency of regulation

Following the Enron scandal in 2001 and WorldCom collapse in 2002, the American government quickly passed new legislation to prevent further corporate scandal and restore confidence in US equity markets. The Sarbanes-Oxley Act of 2002 established the Public Company Accounting Oversight Board, provided for regulation of the accounting profession, created a framework for reform in corporate governance, required enhanced and timelier disclosures by public companies and increased the criminal penalties for any breach of these laws.

The upshot is that the US corporate sector is now one of the most transparent in the world. Whilst there is always scope for further scandal, it would appear that the private investor can have more confidence in the American corporate sector than in many others around the world.

 

10. Volatility

The US equity markets are often characterised by big, heavy stock prices. General Electric trades around $35, Pfizer is currently moving around $28 and AIG sits at a hefty $55. This compares with Vodafone at £1.40, Shell at £5.40 and Barclays at £5.50.

The following table measures the volatility of a range of major US and UK stocks and shares - using a simple daily ‘High’ minus ‘Low’ calculation, averaged over the last 3 years.

US Markets - Average Daily Bid/ Offer Spread

UK Markets - Average Daily Bid/ Offer Spread

GE: 52 points

Vodafone: 3 points

Pfizer: 64 points

Shell: 7 points

Microsoft: 42 points

R.B.S: 32 points

JNJ: 82 points

Lloyds: 10 points

Intel: 62 points

HSBC: 11 points

Wal-Mart: 90 points

HBOS: 16 points

Exxon: 68 points

Glaxo: 25 points

Citi Group: 76 points

BP: 8 points

Bank America: 57 points

Barclays: 11 points

AIG: 128 points

Astra Zeneca: 52 points

Average: 72 points

Average: 17.5 points

Source: Tom Hougaard, City Index, 2005

The US equity market obviously shows greater daily volatility - American stocks are likelier to experience daily price movements outside of the quoted bid/ offer spread than are UK shares. This is counterbalanced, however, by the larger share prices. And the daily volatility measured as a percentage of the share price is broadly similar across both the US and UK markets. 


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