International investments are the securities that you purchase across international borders. Just like domestic investments, these may take a variety of forms, from government debt (bonds) to stocks and ETFs. And, just like domestic investments, the goal is to capitalize on the growth potential of your assets.
Many financial experts advocate investing in international securities as a way to diversify your portfolio and mitigate domestic losses. However, that doesn’t mean these investments are without risk themselves.
There are two main types of international investments:
However, for the purposes of this article, we’re going to focus on the latter, as individuals are more likely to invest in FPIs.
But before you get started investing across borders, it’s important to understand the stability of not only the business, but the country of origin.
Developed markets have advanced economies and offer lower-risk investment opportunities. Typically, this means the country has an established financial infrastructure and a network of corporate marketplaces.
Emerging and frontier markets are usually calculated differently amongst the classifying institutions, which means some countries may receive two competing ratings. Typically, emerging and frontier markets are fledgling economies located within or surrounded by regions of geopolitical instability. However, they also offer huge growth potential to offset the risk.
This map from Global Finance magazine outlines their take on emerging and frontier market investment opportunities in 2019.
The innate diversification and lower correlation that comes with tossing your capital across the border. By adding foreign stocks, bonds and ETFs to your portfolio, you spread your risk and mitigate your losses in the event of an economy-wide collapse. (March of 2020, anyone?)
It’s not just about mitigating your losses, either. If you don’t diversify across economies, you’re guaranteed to miss out on global market rallies when they occur. Just because the NYSE is down doesn’t mean the LSE (London Stock Exchange) is, too – and vice versa.
Additionally, many emerging and frontier markets offer greater potential for growth than developed economies. While they often come with enormous risks, their push to become a thriving economy means that early investors can see huge profits in return.
That said, all financial investments come with some risk. Here are some of the risks that come with international investments:
There are a number of ways to go about adding foreign investments to your portfolio, each with its own benefits and risks.
One of the most common ways is to purchase an ADR, or American Depositary Receipt. U.S. brokers offer these as a way to purchase foreign companies that trade in U.S. markets. These receipts are equal in value to the number of shares listed.
U.S.-Registered Mutual Funds and ETFs are another popular way to gain international exposure on U.S. soil. These funds strive to provide diversification while staying subject to U.S. regulations, which gives investors more control over their investment. U.S.-Registered funds may invest in a combination of foreign and domestic companies, companies solely outside the U.S., or in particular regions, such as Europe, Africa, or Asia.
Some foreign companies trade directly on U.S. stock exchanges. The benefit of this practice is that these companies are subject to many of the same SEC regulations as domestic stocks, which limits their risk. Plus, investors can purchase these stocks from a licensed U.S. broker.
This is the most obvious method to trade in foreign investments – and one of the riskiest. Foreign companies trading in their respective domestic markets are not required to file any reports with the SEC, which means these investments are subject to the whimsy of local regulations and the company in question.
To get started in foreign markets, you can invest with a U.S. broker who trades in foreign securities or go through a foreign broker.
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