The Wisdom Of Owning Foreign Stocks
The title may have caught your eye; if you have never considered owning foreign stocks, now might be a good to start thinking about it. While some investors may consider owning foreign stocks a little too exotic for their blood, successful traders should view this as a speculative opportunity to reap some handsome profits. Many investors are attracted to foreign stocks by the chance to participate in growing economies outside of the United States. In addition, when the US economy is less than attractive or other economies, especially some of the emerging economies, show investment potential, an investor can find good opportunities.
Do you have room for foreign stocks?
Before you consider purchasing any foreign stock, you need to take inventory of your stock portfolio. This is a good practice to perform periodically, reviewing your portfolio and looking for holes; areas where your portfolio doesn’t align with you stock trading plan. If you have a conservative plan you will need to make sure you don’t already have too many growth stocks. If your plan is more aggressive, look to see if you are ready to add more speculative holdings. Even if you are ready, most investment professionals recommend holding 10% or less of your portfolio in foreign stock; if your trading plan is conservative, you should have even less than 10%. This is consistent with holding of speculative stocks in the US as well.
Problems with Foreign Stocks
The biggest problems with foreign stocks are the difficulties in finding, evaluating and buying them confidently. There are a growing number of stocks that trade on the US stock exchanges. In addition, the stock market community formed the American Depository Receipts, or ADR, more than 75 years ago to help in the trading of foreign stock. The ADR works like this; a US bank will buy a large block of stock in a foreign company and package them for reissue in the US stock market. You will be able to identify them as foreign stock, because they always have “ADR” after the name.
Foreign Stocks in the US Markets
One piece of good news for you; foreign stocks in the US markets trade in American dollars so there is no need for doing currency conversions when you buy or sell as these conversions happen behind the scenes. The price of the stock usually follows the price in its original country. Because of this, there are times when the US stock prices and the originating prices don’t match up well. When this happens, the US bank holding the shares may actually bundle shares together and one ADR share might equal two or more of the original shares. Learning how to invest in foreign stocks is actually quite easy.
Benefits of Owning Foreign Stocks
Owning foreign stocks has several attractive benefits. These benefits include:
- Global Economy – Investing in companies occurs all over the world and opportunities have followed. There are many emerging markets such as Eastern Europe, the Pacific Rim, and Latin America.
- Portfolio Diversification – In times when the US markets and economy don’t offer the best investment alternatives, looking to other countries can give you more opportunities.
- Uncommon returns – While there can be significant risk involved, foreign stocks offer a risk reward ratio that is very attractive because of the potential for incredible returns.
Risks of Owning Foreign Stocks
- In spite of the efforts to include foreign stocks in the US stock market, there are still some very significant risks. The currency exchange is a tricky problem because currencies in other countries change much faster than in the US; this can create wrinkles in buying and selling foreign stocks that may work against you. Economic turmoil is another concerning since few countries have the structure to protect investments from inflation; inflation can have a devastating effect on your return on investment, even when the profits are high.
Owning foreign stocks can be very attractive to most investors and they should consider it an option at some point, in spite the risks. Taking a conservative approach and using your portfolio as a shield can make foreign stocks a very good investment.