Everything You Need to Know Before Investing in U.S. Stocks
As we all know, the U.S. stock market is very different from other stock markets around the world, both in terms of trading rules and playing methods. Nowadays, there are more and more newcomers investing in US stocks, but many of them are confused about the basic trading rules of US stocks. So it may be helpful for new investors to take some time to read this article before they start trading.
1. The U.S. Trading Markets
There are 14 exchanges in the United States, as well as dozens of alternative trading systems (ATS) and more than 200 broker-dealer internal matching platforms, forming a trading hub for nearly 300 listed stocks. If divided according to the perspective of the on-market and the off-market, the on-market refers to the exchange market while the off-market includes two parts: one is the trading market outside the exchange in the stock trading market of listed companies, the other is the stock market of non-listed companies market place. The stock exchanges we often contact are mainly the New York Stock Exchange (NYSE), the American Stock Exchange (ASE / AMEX) and Nasdaq.
In terms of market value, the NYSE, which has a history of over 200 years, is the largest stock exchange in the world, with an estimated total value of $21.3 trillion in listed stocks as of June 2017. At present, there are more than 2,800 companies listed here, including most of the large companies with a long history. Most of the 30 constituent stocks of the Dow Jones Industrial Average are listed on the New York Stock Exchange.
In contrast, Nasdaq is much younger, and it is the largest electronic trading market with lower listing fees than NYSE. Generally speaking, the companies listed on Nasdaq are mainly high-tech companies, such as Apple, Google, Microsoft, Oracle, Amazon, Intel, Amgen and other technology giants.
Ranked by trading volume, the American Stock Exchange is the third largest exchange in the United States. In August 1998, it merged with the National Association of Securities Dealers (NASD) to become NASDAQ–AMEX Group, which undertakes the listing business of small and medium-sized companies together with Nasdaq. In addition, unlike the previous two exchanges, AMEX’s exchange-traded funds (ETFs) are relatively successful.
Most companies choose to list on the NYSE or Nasdaq, but if they do not meet the exchange’s listing requirements or do not comply with the exchange’s regulatory requirements, they can trade on the over the counter (OTC) market. U.S. OTC Markets Group is the largest service organization in this market, and investors can also view stock quotes from the over the counter bulletin board (OTCBB) supervised by the U.S. Financial Regulatory Authority.
2. The U.S. Stock Market Indexes
The three most common U.S. stock indexes are the Dow Jones Industrial Average, the S&P 500 Index and the Nasdaq Composite Index.
The Dow Jones Industrial Index (DJIA) is calculated based on the weighted average of 30 reliable and important blue chip stocks in the U.S. stock market from different sectors, including American Express, Disney, Visa, 3M, Apple, Microsoft, Intel, IBM, Cisco, Verizon, ExxonMobil, Chevron, DowDuPont, Home Depot, Wal-Mart, Nike, Procter & Gamble, Johnson & Johnson, Boeing, Caterpillar, Coca-Cola, McDonald’s, Pfizer, Merck, Goldman Sachs, JP Morgan, Travelers Insurance, UnitedHealth, United Technologies, Walgreens Boots Associates.
The S&P 500 Index covers the most popular and most owned U.S. stocks, and the constituents of the index must meet several criteria: U.S. companies with a market capitalization of at least $5.3 billion; 50% of the shares are held by the public; shares above $1; positive earnings report for four consecutive quarters. Because the S&P 500 includes more companies, it can reflect broader market changes.
The constituent stocks of the Nasdaq Composite Index include all shares listed on Nasdaq in the United States, which also means that technology stocks occupy a large weight in the index.
There is also a Russell 2000 index that tracks small-cap stocks. The Russell 2000 Index is a market capitalization indicator representing mid- and small-cap stocks in the market, with a total market capitalization of only $810 billion, less than one-tenth that of the S&P 500.
3. Trading Hours of U.S. Stocks
Normal trading hours:
Daylight Saving Time (Adopted from the beginning of April to the beginning of November every year)
Winter time (Adopted from the beginning of November to the beginning of April every year)
U.S. stocks have a pre-market and after-hours trading mechanism, and often only large companies have pre-market and after-hours trading, during which stock market liquidity is poor and bid-ask spreads are high, and it is usually special events that cause the trading volume to rise, such as earnings reports, major company news, etc.
4. Limits on U.S. Stocks Price Fluctuation
The U.S. stock market uses no price limit and a circuit breaker mechanism. The U.S. Securities and Exchange Commission has set up a “limit price fluctuation restriction” mechanism for individual stocks, that is, if the price rises or falls by more than 5% within 15 seconds, the stock will be suspended for 5 minutes, but the price fluctuation space of opening price, closing price, as well as the price of individual stocks not more than $3 can be relaxed to 10%.
U.S. stocks implement a three-level circuit breaker mechanism for large-cap stock indexes. Taking the S&P 500 index as an example, when the index falls by 7%, trading will be temporarily suspended for 15 minutes; when the stock index falls by 113%, trading will be suspended for 1 hour; when the stock index falls by 20% plunge, the stock market will be closed for 1 day.
5. T+0 Trading and T+3 Delivery System of U.S. Stocks
T+0 trading means that stocks can be bought or sold immediately on the same day. In one trading day, theoretically, countless transactions can be made. T+1 and T+3 mean that after the stock is traded, you need to wait 1 trading day and 3 trading days respectively before you can trade the same stock again.
Different account properties have corresponding trading systems:
One is the cash account, where the total value of the account is generally less than $2,000. The funds traded in the cash account need three trading days to complete the delivery. Only after the delivery is completed, the funds can be used for trading again, which is often referred to as T+3. When an investor buys a security with undelivered funds and sells the security before the funds are undelivered, it will result in a Good Faith Violation.
Each account can have a maximum of 3 violations in 12 consecutive months. When the fourth violation occurs, the account will face a 90-day restriction and will no longer be able to place orders online.
The second is the general financing account, which requires a minimum deposit of $2,000 but less than $25,000. The trading system is T+1, which means that the trading can be carried out one trading day after the stock is traded. And within 5 trading days, a maximum of 3-day tradings can be performed, that is, T+0. The U.S. Securities and Exchange Commission stipulates that if there are 4 or more day tradings within 5 trading days, and these transactions account for 6% or more of the total number of transactions in the same period, it is considered to be a day trading account, and stock transactions will be frozen for 90 days, or until the investor’s account balance reaches $25,000.
The third is the day trading account, where the total value of the account exceeds $25,000. The system automatically defines a day trading account after 4-day tradings have been made on a general financing account over $25,000. The trading system is T+0, which can be reversed unlimited times within a day. At this point, it should be noted that if the day trading purchasing power is used when performing the day trading (based on the cash amount of the account multiplied by 4), the amount used for the day trading purchasing power must be paid off on the same day.