Investing in Foreign Markets
Investing abroad is an attractive proposition for Americans. Investors, if they are lucky, can expect double or even triple digit returns on their investments, which is currently not possible in the comparatively stagnant American economy.
Reasons for Investing in Foreign Markets
There are two reasons why you should consider investing in foreign markets. The first forms the basis of any salient or fantastic investment portfolio: diversification. By investing your money abroad, you will have diversified your investments to a large extent. The second reason is the high growth rates some economies, such as China, Brazil and India, regularly register. High growth rates mean high returns on your investment for you.
Factors to Consider Before Investing Abroad
You will be taking several risks if you are planning on investing in foreign markets. Here are some factors to keep in mind before you invest abroad:
Currency Rates: Currency exchange rates can fall or rise very quickly. This may be fantastic for your investment if local currency is currently strong against the dollar, as your local cash will bring in more dollars when converted, but it could also be damaging should the dollar lose ground to the local currency.
Politic, Social, and Economic Factors: It’s common to see political, social and economic factors affecting investments in the U.S., and it’s the same abroad. It’s recommended that you do a little research into the stability of the environment of the foreign country before investing. It’s usually not wise to invest in a region that’s experiencing civil unrest or political upheaval, for example.
Market Value: The market value of foreign markets rises and falls just like the market in the U.S. In such cases, it’s best if you invest long-term. Short term investments are unlikely to succeed.
Liquidity: You may sometimes find it difficult to purchase stocks or to sell stocks. Some countries place restrictions on the number of stocks you can buy or sell, and you may have to pay above average prices when you buy. Some countries also tax you when you transfer money from your bank account abroad to your home bank account. These fees and restrictions should all be taken into consideration before investments are made abroad.
Information Problems: Most foreign companies are not required to be as forthcoming with information as the companies in the U.S. are. The financial system in the U.S. is, for the most part, more transparent than similar systems found abroad. You may find it difficult to locate information about the stock you are buying. You may find information in a foreign language or not listed at all. Consider working with a reliable contact who lives in or frequently travels to the country you’ll be investing in.
Investing abroad can actually be more expensive than investing in the country, if you take all the unexpected taxes, changing political and economic situations and premium rates for stocks into account. You can invest abroad in the following ways:
Mutual Funds: Mutual funds are generally a safer option than foreign stocks. You can buy global funds, regional funds, international funds, or international index funds.
American Depository Receipts (ADRs): U.S. depository banks issue these ADRs. They are stocks of the foreign companies that trade in the local market.
U.S. Traded Foreign Stocks: Some stocks of foreign companies in the local market are traded the same as in their home country, and not as ADRs.
Direct Stock Trading: This is, perhaps, the most rewarding option, but the one most fraught with much risk.
However you choose to invest, make sure to take into account all the risks and potential rewards before making any large financial commitments.