» Stock Investing Basics » Foreign Stocks Basics

Foreign Stocks Basics

The economy has started to move beyond its local dimension to more global ones. This means that now you have the opportunity to purchase stocks of foreign companies. Therefore, as part of your investment portfolio you should not overlook foreign stocks no matter how exotic they may seem to you.

Emerging markets attract foreign investors especially in times when the local economy is experiencing unbeneficial conditions.

Foreign Stocks Drawbacks

No matter how attractive they may seem, the process of finding, evaluating and purchasing foreign stocks may be quite difficult to some investors.

However, recently this problem has been significantly alleviated since some foreign companies have started to offer their stock on the US stock exchange.

American Depository Receipts Community

In order to facilitate the trade with foreign stocks the ADR (American Depository Receipts) has been established.

Under its conditions, US banks are able to purchase large amounts of foreign stock. After this the shares of stock are grouped and offered at the US stock exchange. From there you can purchase the ones you are interested in.

In order to recognize a foreign stock from a domestic one, look for the ADR abbreviation after the name of the stock.

Your foreign stock purchase is further facilitated thanks to the fact that foreign stocks are sold in US dollars. In this way the currency conversion is eliminated from the buying process.

Currency considerations, on the other hand, are not completely eliminated from the stock, since they are needed in some calculations of its price at the time you decide to sell it.

The price of the foreign stock is influenced by the native exchange and its supply and demand. As a result some discrepancies may occur between the prices at which the stock is traded on the US exchange and the native exchange.

The result of such price discrepancies may be solved by the US bank through the bundling together of shares. As a result one foreign share on the US exchange may equal to two or more shares on the native market.

Foreign Stock Advantages

Foreign stocks as part of your investment portfolio may be beneficial in several ways.

First of all, you get to benefit from globalization. Thanks to the latter you are allowed to seize the opportunities offered on foreign and especially emerging markets. Thus, you don't limit your trading activity just to one place.

This leads to the second benefit of owning foreign stocks, namely diversification. By investing in foreign stocks you significantly diversify your portfolio of holdings. So, when the use economy is suffering you compensate it by the stocks you possess in foreign markets. As a result you significantly reduce the level of risk to which you are exposed.

Even though there is risk in stock investing, the returns you get may be of higher level when investing in foreign stocks, especially when the latter are issued by companies operating in emerging markets.

Foreign Stocks Investment Risk

Foreign stocks are not insured against investment risk. Other considerations you should make when deciding on the investment in foreign stocks include currency exchange risk.

No matter that foreign stocks are purchased and sold in US dollars in the domestic exchange, currency risk can still be observed as a potential threat to your returns. The fluctuations in the currencies of foreign countries may be inconsistent with the changes in the US dollar. This can be reflected in your returns.

Another risk associated with foreign stock investing includes political instability. Such events as civil war or other sort of turmoil may lead to instability in the value of the foreign stock. As a result the returns you get may be affected in a negative way.

You also should not underestimate the effects of inflation in the foreign country. No matter how attractive emerging markets may appear in terms of returns, most of them lack the tools of curbing inflation, which may eat up your returns. As a result your beneficial investment may be turned into dust due to the inability of the local government to deal with rising inflation rates.

Finally, no matter the risks associated with foreign stocks at one point or another it will be good to consider their inclusion in your investment portfolio. Depending on your conservativeness regarding investing include the appropriate percentage of foreign stocks in your portfolio.

Rate this article : Low
  • Currently 3.1/5 Stars
  • 1
  • 2
  • 3
  • 4
  • 5