Why Invest in Foreign Stock?
Though owning foreign stocks sounds both impressive and sophisticated, the purpose of investments is not to make conversation but to make money. The only good reasons to invest in foreign stock are the ones that can lead to profits. Foreign stocks offer an investor the opportunity to make money by capitalizing on the market fluctuations around the world. Foreign stocks also allow investors to avoid more local markets when they are not performing well.
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Diversity
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Investment diversity reduces the risk to the investor of losing money. By owning small parts of numerous companies, an investor stands to lose less from the decline of one of the companies. However, many companies within a nation are dependent on one another to a large extent. By holding both domestic and foreign stock, investors are able to further reduce their investment risk by increasing the diversity of their investments. Having a portion of their investments in foreign stocks can help investors keep their rate of return positive, or at least limit the amount of decline when domestic stocks turn downward.
Emerging Markets
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As the economy of a country grows, the businesses best positioned to profit from the growth may be the local ones. Local businesses understand the needs and desires of the local population and can provide the goods and services in demand. Though many of the popular products sold in the country may be imported, economies need local companies to transport, retail, finance and insure the goods between the docks and the consumer's home. Investors wanting exposure to these foreign markets may find some with domestic stocks that sell to the country, but foreign stocks of the local companies will often provide the higher potential returns. Investors should use caution however, as rapidly growing economies often exist in countries with unstable governments.
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Growth Potential
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Whether a country's economy is "emerging" or already developed, countries with smaller economies have more room to grow than large ones, such as the United States. Investors that fail to invest in these smaller foreign economies may be reducing their potential returns. While investing in many foreign stock markets can be risky, there are stable countries and economies that still offer the opportunity to make substantial returns. Many small countries have the potential for rapid growth, while still offering investors sound governments to oversee and regulate the nation's stock market and businesses.
Regional Economic Cycles
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Another reason that investors may want to consider investing in foreign stock is to take advantage of regional economic cycles. Though the economies of the world are more dependent on each other than in the past, regional differences still exist. For example, a natural disaster in one part of the world could greatly increase demand for building products or lower the supply of natural resources. Though the event may affect distant economies, the greatest effect will be in the local economy. Events like these can create stock buying or selling opportunities for investors.
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