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Everything You Need To Know About The Stock Of Foreign Markets

Everything You Need To Know About The Stock Of Foreign Markets

are not exclusive to the United States alone. Surprisingly, the equity market of the U.S. is just a fraction of what makes the global equity market. This means that there are indeed some stock opportunities to be made outside foreign stock markets. While at first glance you may think that domestic stocks are similar to foreign stocks, there are some notable differences to be learned. Here's what you need to know about the stock of foreign markets, their equities and how they are fundamentally different from the U.S. stock exchange market if you plan on diversifying your portfolio outside the domestic stock world:

Everything You Need To Know About The Stock Of Foreign Markets

The Option to Diversify

Perhaps the number one reason to extend your stock options outside the U.S. is portfolio diversification. Financial experts can confirm this- foreign securities definitely bring a different kind of stock for the investor. The fundamental logic is simple: if the U.S. is experiencing high inflation or suffering from an economic downturn, foreign stock investors will have something to back them up. The investment opportunities are not limited within the local scope. Furthermore, the investments made abroad can be called upon to boost a portfolio that deals exclusively in U.S. equities should the domestic stock market perform poorly.

Opinion is not the same on the idea of diversification. Studies have stated that global investment diversification has worked for a number of years, most notably in the 70's when it stopped assisting returns. There's also a number of reasons for it, including the world's increasing marketplace that has somehow leveled the differences in countries' economic differences.

What's the Risk?

Investing in stock brings about certain risk, but how does it apply to foreign stock markets? First of all, there's the country risk. When comparing the United States over other countries in the past decades, the U.S. has shown remarkable growth and stability all throughout. This isn't always the case with the other foreign nations. Some of these countries have or are currently suffering from economic instability (whether temporary or permanent), social and political turmoils, which make investing in them somehow riskier than usual. What's more, these countries are governed by their own unique set of rules and regulations involving securities; for example, the taxation rules on local stock portfolios can be noticeably detrimental for your investment objectives. Investors are cautioned to learn about the country's current and historical economic conditions, its social and political status before proceeding the investment, as well as being familiar with its security regulations and tax laws regarding stocks.

Secondly, there's what investment experts call currency risk. As you may know, the currency rises and falls differently for the U.S. and other countries. The investments you may have made outside could potentially decline in value due to the fluctuation of rates alone. The general rule is, the more the US dollar gains strength against the currency of the country you're investing in, the more chances you risk losing money. Investors must first exchange their US dollars for the foreign currency in order to start buying stock, and then turn the foreign currency back to US dollars when selling their foreign stock. In the exchange, if the US dollar gains against the foreign currency, the investor stands to lose some of the dollar's value along the exchange. The opposite is also true in this risk- as the foreign currency gets stronger against the US dollar, foreign investors gain more returns.

Buying Foreign Stocks

There's a lot of options to go to when you're considering buying stocks in other countries. It's understandably more difficult than just setting up an account and start purchasing securities in the United States. The investment community as a whole have been trying to bridge that gap to make exchanging global stocks easier than before. You can start the purchase of foreign stocks via an international or global mutual fund. Mutual funds in stocks usually have a bundle of different stocks from all over the globe in varying setups and arrangements. You'll be able to easily see all equities available and see which market equities are emerging. Though mutual funds won't protect you from the risks involved, they are lessened by a professional who has some knowledge in securing foreign stocks.

Aside from going for mutual funds, domestic investors can also buy ADRs, or American Depository Receipts to buy foreign stock. American Depository Receipts were first introduced to the United States by banks in 1927 in an effort to make it easier for an individual to buy and sell foreign stocks in markets abroad. It started when U.S. banks started buying a large number of shares, then bundled them together and reissued them on some major stock exchanges in the US. When you look at it closely, American Depository Receipt work just like any other domestic stock available for those interested in buying securities. Plus, ADRs are beneficial for those who wish to buy foreign stocks because they significantly reduce the costs and administrative fees that come into play when exchanging currencies. Foreign companies also have a lot to gain when converting their stock to ADRs, because it allows them to enter the U.S. investment world and be accessible to those who are interested in buying foreign equities.

Foreign Stock Types

Much like different investment options available within the US stock exchange, foreign stocks are different from each other. There's the economic, social and political variable; a wise investor will look upon these important conditions to see whether investing in stock in a certain country is better than the other countries. There's a notable distinction that becomes clear when considering foreign stocks in general. Emerging stock markets are those who have a potential to be profitable; an example is when a company located within a third world country is quickly becoming an economic force, either by significant economic transitions within the company or in the country, or nations located in the Eastern bloc. The transitional phase the country is undergoing signifies how much potential growth and profit, and of course, how much risk is involved. Suffice to say, it is safer to invest in company stocks located in certain stable countries such as Western Europe or Japan.