Want to Invest in Foreign Markets? Consider These Options

Investing in foreign markets can provide several benefits. These markets typically offer excellent growth potential while additionally giving your portfolio some diversification. The factors that impact your domestic market do not necessarily have the same dramatic effect on international ones, and this can provide some protection for your investment.

Of course, international markets also come with considerable risk in terms of volatility. In addition, you need to consider geopolitical risk and the overall stability of the global and regional economy, as well as potential lack of regulation. Still, many advisors recommend at least some exposure to foreign markets in your portfolio. Once you decide to invest in foreign markets, you have several options for making your entry. Some common ways of investing in foreign markets include:

Foreign direct investing:

As an investor, you can purchase foreign stocks directly by opening a global brokerage account in your home country or by opening one with a broker in the target country. However, direct investing involves additional costs, currency conversion, greater technical support needs, and complex tax implications. Casual investors generally avoid this option because of the complications involved.

In addition, there is always the risk of engaging with a fraudulent broker in the target market, especially if there is no reliable regulatory body there. If you choose to go this route, make sure to do your research and learn as much as you can, not just about the particular stock, but also the market and its regulations. Other options exist if this seems like too much work.

American Depository Receipts (ADRs):

Many foreign companies will use ADRs to establish some presence in the American market. Some ADRs also help companies raise money. Depending on the ADR, trading happens on a national exchange or over the counter. The ADRs represent underlying shares of the company in a different market. Always read the fine print, since one ADR may actually represent more than one share of the company.

ADRs are traded just like any other American stock, so they are convenient for many investors as they cut down on the confusion involved with investing in a new market. Plus, they are traded in American dollars and come with some degree of protection from regulatory bodies.

Global Depository Receipts (GDRs):

GDRs are similar to ADRs, but are usually issued in European markets. This makes them more accessible to European investors than even ADRs. Still, many GDRs are listed in American dollars. However, British pounds and euros are also used for denominations. GDRs are traded just like domestic stocks in their particular market. Most often, you will find GDRs on the London Stock Exchange or exchanges in Frankfurt, Dubai, and Singapore. For the most part, GDRs go to institutional investors in private offerings before they hit the public markets. Make sure you understand regulations in the specific GDR market you’re interested in before you invest.

Exchange-Traded Funds (ETFs):

Many people access foreign markets through international ETFs because they provide exposure to a range of investments and save you the trouble of choosing your own. Some international ETFs have exposure to several different markets while others will focus on just one country. The funds can be based on sector, region, market capitalization, investment style, and other categories. Many different prominent international ETFs have emerged. Before you invest in any ETF, make sure to look closely at the fees, trading volumes, tax ramifications, and liquidity. You should also pay close attention to the portfolio holdings to make sure they align with your goals and ethics.

Mutual Funds:

Mutual funds are another good option if you don’t want to do a lot of your own homework as you invest in foreign markets. Many mutual funds now focus on international equities. By investing in one mutual fund, you get exposure to a much wider range of investments. However, you will still need to select the right fund for your portfolio and risk tolerance, as some can be quite aggressive while others are rather conservative. Funds may focus on a specific country or region. Some funds are designed in a passive manner to track a foreign stock index, while others are much more actively managed. Funds with active management will charge higher fees. In addition, global mutual funds in general have higher fees than domestic ones, simply because of the higher costs of international investing.

Multinational companies:

Some investors may not be comfortable with foreign investment even through ADRs, GDRs, and mutual funds because of the risks involved. If you fall into this category, you can still gain some exposure to foreign markets through multinational corporations. Look for stocks from companies that derive a significant amount of their sales from overseas. While this is not true international diversification, multinationals may be affected by different pressures from domestic companies, and so they may offer some protection from factors impacting domestic markets. If you choose this route, be sure to keep tabs on the company and how it develops internationally as this will affect how it performs in the future.

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