How and Why you should invest Internationally
Here are some irresistible two major reasons why people invest in international investments and investments with international exposure are:
- Diversification. International investing may help U.S. investors to spread their investment risk among foreign companies and markets in addition to U.S. companies and markets.
- Growth. International investing takes advantage of the potential for growth in some foreign economies, particularly in emerging markets.
But there are special risks of international investing, some of the difficulty faced in investing in international markets including:
- Access to different information. Many companies outside the U.S. do not provide investors with the same type of information as U.S. public companies, and the information may not be available in English.
- Costs of international investments. International investing can be more expensive than investing in U.S. companies.
- Working with a broker or investment adviser. If investors are working with a broker or investment adviser, they should make sure the investment professional is registered with the SEC or (for some investment advisers) with the appropriate state regulatory entity. It is generally against the law for a broker, foreign or domestic, to contact a U.S. investor and solicit an investment unless the broker is registered with the SEC. If U.S. investors directly contact and work with a foreign broker not registered with the SEC, they may not have the same protections as they would if the broker were registered with the SEC and subject to the laws of the United States. Investment advisers advising U.S. persons on investments in securities must register in the U.S. or must be eligible for an exemption to registration.
- Changes in currency exchange rates and currency controls. When the exchange rate between the U.S. dollar and the currency of an international investment changes, it can increase or reduce your investment return. In addition, some countries may impose foreign currency controls that restrict or delay investors or the company invested in from moving currency out of a country.
- Changes in market value. All securities markets, including those outside the U.S., can experience dramatic changes in value.
- Political, economic, and social events. It is difficult for investors to understand all the political, economic, and social factors that influence markets, especially those abroad.
- Different levels of liquidity. Markets outside the U.S. may have lower trading volumes and fewer listed companies than U.S. markets. They may only be open a few hours a day. Some countries restrict the amount or type of stocks that foreign investors may purchase.
- Legal Remedies. If U.S. investors have a problem with their investment, they may not be able to seek certain legal remedies in U.S. courts as private plaintiffs. Even if they sue successfully in a U.S. court, they may not be able to collect on a U.S. judgment against a non-U.S. company. They may have to rely on legal remedies that are available in the company’s home country, if any.
- Different market operations. Foreign markets may operate differently from the major U.S. trading markets.
How you can Start to Invest Internationally?
- American Depositary Receipts. The stocks of most non-U.S. companies that trade in the U.S. markets are traded as American Depositary Receipts (ADRs). Each ADR represents one or more shares of foreign stock or a fraction of a share. If investors own an ADR they have the right to obtain the stock it represents, but U.S. investors usually find it more convenient to own the ADR. The price of an ADR corresponds to the price of the stock in its home market, adjusted for the ratio of ADRs to the company’s shares. Investors can purchase ADRs that trade in the United States through a U.S. broker.
- U.S.-Registered Mutual Funds. One way to get international exposure is through U.S.-registered mutual funds. Mutual funds may provide more diversification than most investors could achieve on their own and they are subject to U.S. regulations protecting investors. There are different kinds of funds that invest internationally:
- Global funds invest primarily in foreign companies, but may also invest in U.S. companies;
- International funds generally limit their investments to companies outside the U.S;
- Regional or country funds invest principally in companies located in a particular geographical region, such as Asia or Europe, or in a single country; and,
- International index funds seek to track the results of a particular foreign market or international market index.
- U.S.-Registered Exchange Traded Funds (ETFs). U.S.-registered ETFs can offer similar benefits as U.S.-registered mutual funds. In addition, ETFs are listed on stock exchanges and, like stocks (and in contrast to mutual funds), trade through the trading day with fluctuating market prices.
- U.S.-traded foreign stocks. Although most foreign stocks trade in the U.S. markets as ADRs, some foreign companies list their stock directly here as well as in their local market. Investors can purchase U.S.-listed foreign stocks that trade in the United States through a U.S. broker.
- Trading on Foreign Markets. A U.S. broker may be able to process an order for shares of a company that only trades on a foreign securities market. These foreign companies are not likely to file reports with the SEC, so you will need to rely on other sources of information to make an investment decision.
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