Investing in Foreign Stocks
3 min read
Foreign stocks offer an excellent way to diversify your portfolio and gain exposure to developing markets, but it is crucial that investors understand all associated risks, such as currency fluctuations and market regulations, before making this decision.
Investment in foreign shares through ADRs or GDRs is the primary method. ADRs can be purchased on most brokerages through American Stock Exchange ADR listings; GDRs may only be bought from certain exchanges such as London Stock Exchange ADR listings.
ADRs
The stock market offers investors many investment options, including foreign stocks. Financial advisors recommend allocating up to 25% of your assets towards foreign stocks in order to gain exposure to emerging economies while diversifying your portfolio.
An ADR provides American investors with a simple method for investing in foreign stocks. Each ADR shares represents one fractional share in its home country and trades on major exchanges such as New York Stock Exchange or others.
ADRs offer an easy and safe method of investing in foreign companies by making shares available through your American broker. However, ADRs do not shield investors from currency fluctuations or potential dividend withholding taxes that may apply depending on where their home country tax laws fall; ultimately it’s your decision whether trading foreign stocks makes sense for you and your portfolio.
GDRs
GDRs are financial instruments designed to facilitate investments in foreign stocks on global stock exchanges. Denominated in their home country’s currency and trading like shares, these GDRs give investors access to the underlying company’s stock price, dividend payments and voting rights; unlike ADRs they can be traded directly via brokerage accounts.
Foreign stocks offer access to foreign markets and the potential for higher returns; investing in them can also diversify your portfolio and protect it from domestic economic downturns. But investors must be mindful of potential risks before proceeding with any investments abroad. It would be wise to consult a financial advisor prior to investing abroad.
For investors hesitant to commit directly to foreign stocks, another alternative may be investing in companies that generate significant portions of their sales from international operations – for instance multinational corporations like Coca-Cola or McDonald’s that generate significant sales abroad. Although this approach provides international diversification, investors should bear in mind that local regulations could influence such investments as well as how quickly investment environments in some countries change.
Direct Investing
Financial advisers typically recommend allocating between 5-15% of your portfolio for foreign stocks for conservative investors and 25% for aggressive investors.
International investing can present unique risks. Overseas stock markets may experience more volatile growth; political or economic events can destabilise an entire country’s economy; currency fluctuations may have an effect on your returns; different trading regulations, protocols and taxes make finding the appropriate balance challenging.
And while investing in foreign stocks offers many advantages, its complexity may make it challenging for some investors. Luckily, there are various methods of purchasing foreign shares including ADRs, GDRs, ETFs and direct investments – for more information about international investing you may wish to arrange an appointment with your advisor.
Diversification
Diversifying the assets in your portfolio is crucial to minimizing overall risk and smoothing out short-term fluctuations. Diversification may involve diversifying by market capitalization (large, mid, and small cap stocks), sector (such as technology, health care, or energy) or investment style (growth vs value).
Consider including foreign stocks as part of your equity allocation strategy. International markets provide unique opportunities that may increase long-term returns; but before making this investment decision it’s wise to carefully consider any associated risks, costs and your individual investing goals and expertise.
Start investing with an exchange-traded fund or mutual fund that tracks global equities – these funds allow easy diversification by region, country and market type (developed, emerging or frontier markets) through brokerage accounts. ADRs (American Depository Receipts) also represent certain number of shares and trade, clear, and settle just like domestic shares do.
