It is estimated that by the year 2030 the United States will make up only one-quarter of all global corporate capital markets. As of 1988, the United States held two-thirds of the global corporate market.Trends like these are hard to ignore when your money is on the line. Investing in the international stock market exchange is a smart way to diversify your investment risk and also to prepare for the oncoming changes in today’s global market.Fortunately, foreign markets and U.S. markets seldom match each other in profitability within the same time frames. One is usually up, while the other is down. These conditions further reduce your overall investment risk and enhance your portfolio’s potential profitability overall. Here are a couple things to look out for when investing in the international stock market.
Choose your investment channel. If you're considering investing in the international stock market, most likely you already have a brokerage account in place. With international investments, it's best to have a knowledgeable adviser in your corner. If you've been going it alone up to this point, you might want to consider a full-service brokerage firm or a fee-based service to help you navigate this new terrain. Understanding currency exchange procedures, regulatory requirements and overall portfolio management advice is much needed when investing in the international stock market.
Research the global stock market. Two types of markets dominate the global stock exchange: Mature markets--These include the United States, London and Europe. These are markets in which growth potential is small. The corporate market momentum has pretty much stabilized.Developing markets--These markets are called BRIC economies and include the countries of Brazil, India, China and Russia. These are developing countries, and so their corporate market growth potential is large.You would think the developing markets would be the wise investment choice; however, developing countries are prone to frequent economic and political change. Changes like these impact the corporate structure of a country’s market system and can drastically improve or depreciate the value of a stock investment.Mature markets offer stability but little opportunity for growth. The potential for technological advancement within a mature market system is, however, a possible growth opportunity. Take some time to get a feel for the economic and political climates of the countries you’re looking to invest in. Changes in a country’s leadership, talk of intercontinental alliances or the potential of war or upheaval are things to look for when considering how stable an investment will be.
Match portfolio needs with international stock type. There are several different investment packages to consider when choosing international stocks. You can invest in a specific oversees company, or you can invest in a group of companies or even a group of countries.The main types of investment options offered by brokerages are:American depositary receipts (ADR)--These allow investors to invest in international stocks without buying into a foreign exchange.Exchange-traded funds (ETF)--These are, in essence, mutual funds that can be traded just like individual stocks.International funds--These are similar to exchange-traded funds. The only difference is they’re handled by a portfolio manager, and all decisions are made by the portfolio manager.Foreign securities--This is when an investor purchases international stock directly from his broker’s international trading desk.
Choose your broker carefully. More oftentimes than not, U.S. brokers who trade on the international market are trading through domestic market makers. The market maker is the middleman, and he’s the one who’s actually carrying out the trade exchange. As such, market makers make a profit off your investment monies. This is an extra cost that can best be put toward the investment stock itself.Instead, look for brokers who deal directly with oversees traders. Of course, they’ll charge a trading commission, but this charge is substantially lower than what goes to a domestic market maker.
Track currency exchange rates. Investing in oversees stock means your U.S. dollar will be converted to whatever a country’s currency is. The drawback here is not all currencies are created equal.Translating your U.S. dollar into a foreign currency rate means price quote amounts, dividends and fees will be altered to reflect the difference of value in the currencies in play. Make it a point to understand the currency exchange rates that apply to your portfolio makeup and incorporate them into your investment budget planning process.
Tips & Warnings
- Make international investments a portion of your investment portfolio, rather than its sole contents. This will lessen the risks that come with investing in overseas stock.
- The effect of currency translation does diminish over time. A company’s individual and overall track record will ultimately determine its profitability.
- Financial information on individual overseas companies may be harder to find depending on what disclosure practices are in place for a particular country.
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