Foreign Stock Characteristics
In today's global economy investors are given the opportunity to purchase stocks of foreign companies. They have a wide choice and many alternatives to execute the trades. Foreign stocks provide an additional piece of diversification to your portfolio since different economies over the world follow their own cycles. In this way you can offset volatilities of the US securities you own.
Foreign stocks come in a variety of sizes. Additionally, their price movements are different from each other. As a result predicting the exact movement of a foreign stock is very difficult.
A benefit of foreign stocks is that they are liable to different from the US accounting rules. Additionally, the US stock field is famous for its highly regulated nature by the SEC, which is not observed to such a high extent in other countries.
However, you should not be deluded that trading foreign stocks is less complicated than executing trades with US stocks.
This is the main reason why individual investors that are attracted by foreign stocks tend not to rely on hazardous strategies. Most of them put their resources in mutual funds that automatically provide them with a professional management of the assets by experts that have the qualifications for foreign stock trades. Additionally, others tend to invest in foreign stocks that have established their name as a reliable, large and well established.
If you select the first option of purchasing an international mutual fund, you will not have to deal with any more different aspects than those that are present at domestic ones. However, if you decide to purchase individual stocks, then you have these alternatives:
- Purchase them through a broker from the foreign market
- Purchase American Depository Receipts (ADRs), which are offered on the US market.
ADRs represent substitutes of foreign shares. Their value is in the dollar currency and their movement corresponds to that of the foreign issuers.
When you decide on the investment in foreign stocks you should have in mind that these economies also suffer major events, which may result in negative consequences. On the other hand, you should not forget the positive effects such as those that have occurred as a result of the economic union in Europe.
Finally, diversification should be applied in foreign stocks as well in order to offset potential downs in one country with ups in another.
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