A brief guide to international investing
Foreign markets make up close to 50% of all opportunities for
investing in stocks and bonds. As the world of business becomes
more globalized, investors are seeking new avenues to invest and
diversify with, but there are special issues to consider when
investing in foreign markets. There can be great advantages to
investing internationally as long as you keep the risks in mind.
Most investment advisors recommend diversifying your portfolio
with 10% to 20% of your investments being made in the
international markets. A good understanding of your specific
goals and the additional risks are important to making sound
investment choices.
When investing in foreign markets, it is important to keep track
of the exchange rate between the market currency and the US
dollar. The impact of the exchange rate is opposite to the rise
or fall of the dollar. For example if you were to invest in the
German stock exchange, the Deutsche Brse AG, you would need to
keep track of the exchange rate between the US dollar and the
Euro. As the Euro rises against the US dollar, you will earn
more, if the dollar rises, you will earn less. The stronger the
dollar the less a US investor will earn over time in a foreign
market. Diversifying in several foreign markets can help
mitigate the risk and still allow an investor to reach the
higher returns available from other markets.
One option for global diversification in your portfolio is to
purchase American Depository Receipts. ADRs are the easiest way
to purchase foreign shares. American banks issue ADRs and the
certificates represent indirect ownership in specific foreign
firms. ADRs allow an investor to buy, sell, and receive all
dividends in US dollars, making the tax paperwork much easier to
follow. If a company pays dividends those payments are sent
through a US clearinghouse and promptly paid in US dollars.
Publicly traded sponsored ADRs are registered with the Security
Exchange Commission (SEC). There are two levels of sponsored
ADRs; Level I ADRs are typically purchased OTC and generally
represent either smaller companies or companies that cannot list
on the larger exchanges. The Level I ADRs are exempt from US
reporting rules. Level II ADRs are listed on the NYSE or Nasdaq
exchanges and must report using the SEC Form 20-F.
Direct purchases of foreign stocks are made through one of the
foreign exchanges in the foreign currency. Direct purchases
usually have slightly lower transaction costs, but the costs of
changing currencies can limit the advantage. If you want to
invest in a specific foreign company, however, it may be the
best way for you to do that. To find out which exchange the
company you are interested in works with, use the company
website for investor information.
Many US investment firms offer a third alternative. You can
purchase global mutual funds that are diversified across many
countries. These individual funds are available with
concentrations in a given market (such as the German Stock
Exchange), region (such as South America or Europe), or specific
industries (such as high tech or energy related stocks). These
mutual or bond funds offer a great way for you to invest
internationally and still be able to make easy trades. Most of
these mutual funds are listed on the New York Stock exchange and
can easily be purchased through your broker.
To find foreign market investment opportunities or to learn more
about the markets some great resources are the World Federation
of Exchanges (
http://www.world-exchanges.org), The Bureau of
Economic Analysis (
www.bea.gov), or the Federal Reserve
(
www.federalreserve.gov).
You can find more information here:
http://tradingideas4you.com/finance-money/finance-money.html
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