There are different ways you can invest internationally: through mutual funds, American Depositary Receipts, exchange-traded funds, U.S.-traded foreign stocks, or
direct investments in foreign markets. This online guide explains the basic facts about international investing and how you can learn more about foreign companies and markets. Although this
section covers foreign stocks, much of it also applies to foreign bonds.
As investors have learned recently, the market value of investments can change suddenly. This is true in the U.S. securities markets, but the changes may be even more dramatic in markets
outside the United States. The world's economies are becoming more interrelated, and dramatic changes in stock value in one market can spread quickly to other markets.
Keep in mind that even if you only invest in stocks of U.S. companies you already may have some international exposure in your investment portfolio. Many of the factors that affect foreign
companies also affect the foreign business operations of U.S. companies. The fear that economic problems around the globe will hurt the operations of U.S. companies can cause dramatic changes
in U.S. stock prices.
Sudden changes in market value are only one important consideration in international investing. Changes in foreign currency exchange rates will affect all international investments, and there
are other special risks you should consider before deciding whether to invest. The degree of risk may vary, depending on the type of investment and the market. For example, international mutual
funds may be less risky than direct investments in foreign markets, and investing in developed economies may avoid some of the risks of investing in emerging markets.
Why do many Americans invest in foreign markets?
Two of the chief reasons why people invest internationally are:
1) Diversification - spreading your investment risk among foreign companies and markets that are different than the U.S. economy, and
2) Growth - taking advantage of the potential for growth in some foreign economies, particularly in emerging markets.
By including exposure to both domestic and foreign stocks in your portfolio, you'll reduce the risk that you'll lose money and your portfolio's overall investment returns will have a smoother
ride. That.s because international investment returns sometimes move in a different direction than U.S. market returns. Even when international and U.S. investments move in the same direction
the degree of change may be very different. When you compare the returns from emerging international markets with U.S. market returns you may see even wider swings in value.
Of course, you have to balance these considerations against the possibility of higher costs, sudden changes in value, and the special risks of international investing.
What are the special risks in international investing?
Although you take risks when you invest in any stock, international investing has some special risks:
1) Changes in currency exchange rates: When the exchange rate between the foreign currency of an international investment and the U.S. dollar changes, it can increase or reduce
your investment return. How does this work? Foreign companies trade and pay dividends in the currency of their local market. When you receive dividends or sell your international investment,
you will need to convert the cash you receive into U.S. dollars. During a period when the foreign currency is strong compared to the U.S. dollar, this strength increases your investment return
because your foreign earnings translate into more dollars. If the foreign currency weakens compared to the U.S. dollar, this weakness reduces your investment return because your earnings
translate into fewer dollars. In addition to exchange rates, you should be aware that some countries may impose foreign currency controls that restrict or delay you from moving currency out of
a country.
2) Dramatic changes in market value: Foreign markets, like all markets, can experience dramatic changes in market value. One way to reduce the impact of these price changes is
to invest for the long term and try to ride out sharp upswings and downturns in the market. Individual investors frequently lose money when they try to "time" the market in the United States
and are even less likely to succeed in a foreign market. When you time the market you have to make two astute decisions -- deciding when to get out before prices fall and when to get back in
before prices rise again.
3) Political, economic and social events: It is difficult for investors to understand all the political, economic, and social factors that influence foreign markets. These
factors provide diversification, but they also contribute to the risk of international investing.
4) Lack of liquidity: Foreign markets may have lower trading volumes and fewer listed companies. They may only be open a few hours a day. Some countries restrict the amount or
type of stocks that foreign investors may purchase. You may have to pay premium prices to buy a foreign security and have difficulty finding a buyer when you want to sell.
5) Less information: Many foreign companies do not provide investors with the same type of information as U.S. public companies. It may be difficult to locate up-to-date
information, and the information the company publishes my not be in English.
6) Reliance on foreign legal remedies: If you have a problem with your investment, you may not be able to sue the company in the United States. Even if you sue successfully in
a U.S. court, you may not be able to collect on a U.S. judgment against a foreign company. You may have to rely on whatever legal remedies are available in the company's home country.
7) Different market operations: Foreign markets often operate differently from the major U.S. trading markets. For example, there may be different periods for clearance and
settlement of securities transactions. Some foreign markets may not report stock trades as quickly as U.S. markets. Rules providing for the safekeeping of shares held by custodian banks or
depositories may not be as well developed in some foreign markets, with the risk that your shares may not be protected if the custodian has credit problems or fails.
What are the different ways to invest internationally?
1) Mutual funds: One way to invest internationally is through mutual funds. There are different kinds of funds that invest in foreign stocks.
a) Global funds invest primarily in foreign companies, but may also invest in U.S. companies.
b) International funds generally limit their investments to companies outside the United States.
c) Regional or country funds invest principally in companies located in a particular geographical region (such as Europe or Latin America) or in a single country. Some funds
invest only in emerging markets, while others concentrate on more developed markets.
d) International index funds try to track the results of a particular foreign market index. Index funds differ from actively managed funds, whose managers pick stocks based on
research about the companies.
International investing through mutual funds can reduce some of the risks mentioned earlier. Mutual funds provide more diversification than most investors could achieve on their own. The fund
manager also should be familiar with international investing and have the resources to research foreign companies. The fund will handle currency conversions and pay any foreign taxes, and is
likely to understand the different operations of foreign markets.
Like other international investments, mutual funds that invest internationally probably will have higher costs than funds that invest only in U.S. stocks.
2) Exchange-Traded Funds: An exchange-traded fund is a type of investment company whose investment objective is to achieve the same return as a particular market index.
Increasingly popular with investors, ETFs are listed on stock exchanges and, like stocks (and in contrast to mutual funds), trade throughout the trading day. A share in an ETF that tracks an
international index gives an exposure to the performance of the underlying stock or bond portfolio along with the ability to trade that share like any other security.
3) American Depositary Receipts: The stocks of most foreign companies that trade in the U.S. markets are traded as American Depositary Receipts (ADRs) issued by U.S. depositary
banks. See Adr's
U.S. Traded Foreign Stocks
Although most foreign stocks trade in the U.S. markets as ADRs, some foreign stocks trade here in the same form as in their local market. For example, Canadian stocks trade in the same form in
the United States as they do in the Canadian markets, rather than as ADRs. You can purchase ADRs and other foreign stocks that trade in the United States through your broker. There are
different trading markets in the United States, and the information available about an ADR or foreign stock will depend on where it trades.
Stocks Trading on Foreign Markets
If you want to buy or sell stock in a company that only trades on a foreign stock market, your broker may be able to process your order for you. These foreign companies do not file reports with
the SEC, however, so you will need to do additional research to get the information you need to make an investment decision. Always make sure any broker you deal with is registered with the
SEC. It is against the law for unregistered foreign brokers to call you and solicit your investment.
What should I do if I want to invest?
Like any other investment, you should learn as much as you can about a company before you invest. Try to learn about the political, economic, and social conditions in the company.s home
country, so you will understand better the factors that affect the company.s financial results and stock price. If you invest internationally through mutual funds, make sure you know the
countries where the fund invests and understand the kinds of investments it makes.