Diversifying Portfolios With Foreign Stocks
When it comes to investing, the more options one has, the better. International markets open up new opportunities for investors with different risk appetites. Foreign stocks provide new ways to diversify portfolios and benefit from the economic growth of other geographic regions. It is often advised to ensure that 5% to 10% of a portfolio is constituted of foreign stocks. More aggressive investors may be increase their allocation to 25% which is considered as acceptable.
Foreign stocks are typically riskier than stocks from home soil. Often times, the political risks tied to stocks can be significant with a propensity to materialise unexpectedly. The risks also extend to the regulatory weaknesses of some countries. With relatively low regulatory standards, listed companies in some countries are subject to higher operational risks than the typical American company.
Different Types of Stock Exchanges
While the New York Stock Exchange is the biggest stock exchange in the world, there are other stock exchanges which provide significant amount of returns. The Tokyo Stock Exchange is home to $3 trillion dollars worth of companies. The strength of Japan’s national currency has helped to boost the exchange in the past despite the fact that it has been experienced a less than impressive trend over the last twenty years.
The London Stock Exchange has companies which represent $2.3 million in market captialization. Multinational companies opt to list on the exchange for several reasons. It implements robust regulatory frameworks.
Different countries have stock exchanges which show potential to provide great returns. Stock exchanges differ in strengths and weaknesses. Some stock exchanges are still trying to find their feet, with very few years of operation in their records.
China and India
External regions of particular interest to US investors includes China and India. These markets present promising prospects as their burgeoning populations and positive economic growth boosts their stock markets. With time, these nations have been able to build companies that are comparable to the sizes of American companies. This presents positive potential for return on investment from stocks Unfortunately, markets like these are challenging to invest in as an outsider.
Ofcourse mutual funds and ETFs may serve as less risky methods of investing in foreign markets but there are several benefits of direct ownership of the shares that may not be possible with ETFs and mutual funds.
Investment in Chinese companies can be carried out through A-Shares.Shanghai and Shenzhen stock exchanges list these shares.
Using a Brokerage Firm
Individuals looking to invest in shares on foreign markets will have to contact their brokerage firm to gain assistance. Brokerage firms provide such services so it helps to confirm if your firm can provide assistance in obtaining foreign shares. Unfortunately, some firms may not provide services to purchase all types of foreign shares. This means that in some cases, an alternative method may have to be explored.
Making direct investments in foreign stocks is a very complicated processes.It requires adequate treatment of costs, tax regulations, and currency conversions. It is advisable to consider the significant amount of planning that goes into making direct purchases of stocks abroad. The process often requires help from different seasoned professionals who can offer expert guidance.
Exchange rate risk is an important consideration for purchasers of stocks abroad. Exchange rates influence the returns on investment that is made from foreign stocks. For example, the purchase of a foreign stock in a nation where the currency value rises, the return on the stock purchased increases.
American Depository Receipts
American depository receipts are certificates which represent shares in foreign companies.Each American depository receipt represents the shares using a ratio. This allows for the price to be equated in the home country and in the issuing country. These certificates may be obtained with the help of U.S. banks. Foreign companies are obliged to provide regular financial reports to the banks. This method of acquiring shares in foreign companies is cost-effective on account of the fact that foreign exchange is not required to acquire the certificates. They trade on American stock exchanges.
American depository receipts may be sponsored or unsponsored. Level 1 American depository receipts can’t be used for the purpose of raising capital. They can only be traded over-the-counter. Level 3 American depository receipts may be used to raise capital.
There are companies abroad who’s sales and revenue, for the most part, is made outside of their country. Multinational corporations make significant revenue from beyond the US boarders. They are able to provide high returns from operations abroad. The return on investment made from such countries can, in many cases, be more than the returns earned from certain stocks from foreign companies. While the investment is not in a foreign company as would be expected, it does allow for investors to benefit from the economic growth of other nations.
Calvin Ebun-Amu is passionate about finance and technology. While studying his bachelor’s degree, he found himself using his spare time to research and write about finance. Calvin is particularly fascinated by economics and risk management. When he’s not writing, he’s reading a book or article on risk and uncertainty by his favourite non-fiction author, Nassim Nicholas Taleb. Calvin has a bachelors degree in law and a post-graduate diploma in business.