Foreign stocks: Good or Bad Investment?

Foreign stocks can give you a high return, or wipe out your nest in a single bound.

Buying foreign stocks is a good add-on to your investment nest. They provide a shock absorber once the U.S. market slows down. In most cases, the double- and triple- digit increase in foreign stock markets is the main magnet why many are attracted to foreign stocks. Do remember that foreign stocks are just one egg in your investment nest. A slew of other investments can be in domestic stocks, bonds, real estate and even your own business.

Benefits of foreign stocks

Charles Schwab has four reasons why invest in foreign stocks. First, the potential of higher returns in markets abroad is clear. The emergence of the middle class in Brazil and China; the exploration of natural resources in Canada, Australia and Norway; and the growing businesses in BRICS markets as many of these firms are major players in the global supply chain. Second, foreign stocks are becoming a steady part of investment portfolios amidst the recent U.S. recession that shows cracks in purely investing locally.

Fourth, the investment and brokerage firm believes that having multiple currencies adds another  layer of diversification, especially in a world economy scene, which, if you haven’t noticed, is driven by other currencies other than the U.S. dollar.

Lastly, having foreign stocks in your nest means lowering the risk of losing money during a U.S. downturn. In many cases, a number of foreign stock markets behave inversely proportionate to the US exchanges. That means earning  returns even if your American stocks are going down. Of course, the reverse can be true, too, which makes foreign stocks just as risky as your local equities.

Risks of foreign stocks

Scams should be the top reason to watch out for when buying foreign stocks. Finra offers tips on how to spot these scam stocks, notably the low-priced, high-yielding claims in the so-called China stocks.

Another risk is your diminished shareholder right pointed out by The Motley Fool. Understandably, U.S. laws don’t apply in other countries. The accounting standards may be different. Government intervention can happen. Worse, collusions between the companies’ high-level players and government agencies can cost you lots of sleepless nights. The Motley Fool has identified two of these scenarios that happened in Russia and China, but the same stories can happen everywhere, anyway.

Ways to buy foreign stocks

Investopedia sums up the popular ways to buy foreign stocks. The most direct is to buy stocks in your target country as you would in the U.S. Whether you do it on your own or via a broker, the direct purchase is harder than it looks. Accessibility to the juicy stocks may be limited if not all together impossible; or acquiring updated information to make a calculated guess which stocks are on the rise may be hard to come by.

Read more:  Summer Cooking Recipies - Frugal Ideas For A Fun Cookout

Another way is through mutual funds, such as Motley Fool’s Epic Voyage Fund. The fund pools together  investment from American individual stock players and seeks high-performing foreign companies in emerging markets, especially in the BRICS—Brazil, Russia, India, China and South Africa. It is a good example how mutual funds work, the benefits and risks included.

Yet another, and maybe less riskier, way to buy foreign stocks is opting for American depository receipts or ADR. Since many foreign companies especially the big ones also trade in U.S. stock markets, you can buy these equities without going out of the country.

It is easy to identify these foreign stocks; they have an “ADR” tag at the end. They are bought in large quantities by an American bank or an investment firm and lumped to create these ADR reissues for individual stock buyers.

About.com explains ADR further, including the risk that ADR stock prices may not accurately match the price in their native country

Europe may not be the best foreign stock option

A CNN analysis tells why buying foreign stocks in Europe may amount to little diversification, as what foreign stock buying should be about.

The recent collapse of stock markets in Greece, Spain and Italy illustrates why a European slowdown can move simultaneous to a U.S. weakening of the economy.  That is because much of Europe’s economic dynamics are tied up to the U.S. market.

Buying away from Europe may not be easy, the report says, as many funds carry a big chunk of European stocks than equities from Asia’s emerging markets.

The CNN analysis also provides tips that border common sense when buying stock overseas, such as: following the news in the native country; and understanding the interconnectivity of a global economy.

CONCLUSION

Foreign stocks should just form a part of your overall investment portfolio. After all, the key to wise investment is to diversify, spread out the risks and potential to earn across various investment channels. Still, investing in foreign stocks has become a major undertaking by large investment groups, knowing that the U.S. economy is fast losing its grip as the only major economy in the world.

ARE YOU ENGAGED IN FOREIGN STOCKS RIGHT NOW?
WHAT FIRST-HAND TIPS CAN YOU SHARE FOR THE FIRST-TIMER?

 

Category: Financial News

Leave a comment!

Add your comment below, or trackback from your own site. You can also Comments Feed via RSS.

Be nice. Keep it clean. Stay on topic. No spam.

You can use these tags:
<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

This is a Gravatar-enabled weblog. To get your own globally-recognized-avatar, please register at Gravatar.

I agree to publishing my personal information provided in this comment.

Page last modified

Share
Tweet
+1
Share