- With US stocks accounting for around 43% of the total value of global markets, international stocks are an additional opportunity for investors.
- From a portfolio management perspective, investing a portfolio of investments in foreign companies is one way.
- Investing in foreign markets may expose you to risks associated with exchange rates, political or economic instability, and differences in tax reporting and regulations.
Lack of direct correlation between foreign markets and the US stock market.
US stocks account for only about 43% of the total value of global markets. Investors in international stocks are an additional opportunity. Many of the largest companies that manufacture steel, electronics, and appliances are located outside the US. There are 16 major stock exchanges in the world with a market capitalization of more than $1 trillion. There are plenty of opportunities in fast-growing economies outside the US, and among them are companies with unusual rates of return.
From a portfolio management perspective, investing a portfolio of investments in foreign companies is one way. For example, US and foreign stocks don’t always move together. When one stock market goes up, the other can go down and vice versa. In technical terms, these markets are said to be uncorrelated. A diversified portfolio balances unrelated assets to spread risk.
Of course, that doesn’t mean that US and foreign stocks are constantly moving in different directions. Many countries are highly dependent on the US for imports and exports and can be susceptible to market swings in the US Due to the interconnectedness of the global economy, stocks often move in the same direction, especially when the US has a bear or bull market. . However, in the long term, the US and foreign stocks are pretty independent.
International Equity Risk
However, investors should appreciate the serious risks of international equities. The first risk is knowing the exchange rate risk. A US investor’s return on a stock from a foreign country is tied to changes in currency values between the US dollar and that country’s currency. If he buys Japanese stocks and the Japanese yen rises against the dollar between the time he buys and sells the stock, his return is worth more. On the other hand, if the yen weakens, the return on your investment weakens.
In addition to volatility in the currency markets, there is also country risk when investing in international stocks. Many countries also suffer from political, social, and economic instability, which increases the risk of investing in their markets. Lastly, it can be more difficult to do your due diligence before purchasing security when the product is from another country. Foreign governments have various securities tax and reporting regulations. In many cases, foreign companies are not required to provide the same detailed information that US companies are required to provide, and foreign companies may use different accounting procedures, which can make analysis difficult.
How to buy foreign stocks
For investors who have the patience to do extensive research, international stocks can offer big rewards. While many investors understand the rationale for investing abroad, the mechanics of buying shares in a currency can put them off. Below are some strategies for investing in foreign companies.
American Depository Receipts (ADRs)
American Depository Receipts (ADRs) can help make foreign markets accessible to US investors. ADRs are listed on the New York Stock Exchange (NYSE) and Nasdaq, and may be traded, settled, and held as if they were common shares of companies based in the United States. Foreign companies with ADRs issue financial reports that generally comply with US accounting conventions and Securities and Exchange Commission (SEC) rules. Companies with ADRs include Nokia (Finland), GlaxoSmithKline (UK), and Sony (Japan).
Although listed on US exchanges, ADRs still offer diversification benefits, and ADR prices tend to behave similarly to the foreign stocks they represent.
US Stocks Traded Internationally
Some foreign stocks have met the listing requirements of the New York Stock Exchange (NYSE) or Nasdaq and are therefore traded on US markets.
American multinational corporations
As an investor, it is also worth considering investing in domestic stocks with exposure to foreign markets because many US companies generate most of their income outside of the US. They can buy shares of US multinational corporations to be an effective way for investors to gain exposure to the global world. Economy.
It is an opportunity for diversification of foreign stocks
Because foreign markets are not directly related to the US stock market, investing outside the US can be an effective way to diversify your portfolio. It can expose you to risks associated with exchange rates, political or economic instability, and differences in tax and reporting regulations. However, it is worth thoroughly investigating the possible benefits for patient investors, the risks of accessing foreign markets through instruments such as ADRs, international exchanges traded on US exchanges, and investing in multinational corporations. from the USA