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 According to the Securities and Exchange Commission, international investing continues to be a popular and expanding area for American investors. As early as 1985, the total capitalization, or market value, of foreign stocks surpassed the value of U.S. stocks for the first time. Add to this the tripling of the number of foreign companies that have registered with the SEC over the last 15 years and we see an interesting trend emerging
Americans have a growing interest in foreign companies; and the fact that so many foreign companies are registering with the U.S. Securities and Exchange Commission means these companies are also interested in American investors. But why the sudden interest in international investing over the last 15 years?
Advantages of International Investing
There are two main reasons that investors in American have been flocking to international companies - growth and diversification.
Growth of International Companies
There is no doubt that the American economy is experiencing a period of slow growth. Recently it was announced that over the past year the U.S. gross domestic product, or GDP, grew at 3.7%. Growth in productivity, however, was only 2.5% - which is the result of even slower growth in output per hour.
Compare the U.S. GDP figures to China and Pakistan, which are experiencing grow rates of 9.5% and 8.4% respectively, and you have a pretty good idea of where the real economic growth opportunity exists - overseas!
Diversifying with International Companies
The other advantage international investing has to offer is that of diversification. By spreading your money across both international and domestic companies you've got more opportunity to lower the overall risk of your investment portfolio. That means if the US economy starts to falter, you've got the chance to leverage growth in a foreign economy and thereby maximize the returns of your stock portfolio.
Risks of International Investing
Let's face it; the stock market is a pretty risky place to invest. But international investing carries with it another set of risks that you should be aware of. In fact, many of these are quite significant and can make international investing problematic for many American investors.
International Currency Rates
When you invest in an international company you are also assuming a risk associated with international currency rates. When you purchase stock in the international company, the American dollar needs to be exchanged for the foreign currency. When you eventually sell the stock, that foreign currency needs to be converted back into American dollars.
During the time when you hold this international investment, the exchange rate of American dollars and the foreign currency can shift. This shifting can have an impact on the return on your investment.
For example, in you're investing in a company that has experienced strong growth and the currency of that country is strong compared to the US, then you benefit from the company's growth and the exchange rate. Of course the opposite can also occur - either offsetting a potential gain or adding to a loss.
International Politics
Let's face it; while some may complain about the policies of the US government, there is not doubt that the government itself is stable. The same cannot be said for many emerging international economies. When investing in foreign companies, there are very real risks of government destabilization and consequent impacts on the foreign corporations themselves.
Operations of International Stock Markets
Our final comment on the risk of international investing has to do with operations of foreign stock markets themselves. Foreign companies not registered with the US Securities and Exchange Commission may not report financial information on a frequent basis, often leaving investors wondering what is happening with the company itself.
There may also be different rule for the clearance and settlement of stock trades. The confirmation of trades and the reporting of the transaction may be much slower than in Americans markets. Finally, shares are often held safe with custodian banks and depositories. If this holding bank runs into financial difficulties, your shares may not be protected.
Ways to Invest Internationally
Now that we've explained to you the benefits and downside of international investing, were going to explain to you how you can participate in these foreign markets. There are probably more ways to invest internationally then we are going to mention, but we'll cover here the three most common ways - mutual funds, American Depository Receipts and stocks traded on foreign markets.
International Mutual Funds
Perhaps the easiest way to invest internationally is to purchase mutual funds. In fact, you have your choice of several types of foreign mutual funds - each offering the investor a slightly different opportunity to play in the international market. Such groups of international funds include:
- International Index Funds - like their counterparts domestically, these funds attempt to mimic the returns of international stock exchanges.
- International Funds - funds of companies located outside of the United States.
- Regional Funds - mutual funds that invest in companies located within a specific geographic region such as South America or a specific country.
- Global Funds - mutual funds of this type offer the opportunity to invest money on a global or worldwide basis, including foreign and domestic companies.
American Depository Receipts
Most of the international stocks traded in the United States are traded as American Depository Receipts, or ADRs, that are issued by US depository banks. By owning an ADR, you are entitled to obtain the number of shares listed on the ADR but most US investors find it more convenient to hold the ADR instead.
One advantage of holding an ADR is that the trade clears and settles in American dollars. The depository bank will covert stock dividends for you and may also arrange for voting. The downside of owning an ADR is that the depository bank acts like a middleman and this adds to the time and cost in the form of transaction fees.
Stocks Traded on Foreign Markets
If the international company only trades on a foreign market, then you may need the help of a stock broker to process the transaction. Make sure that the broker you're using is registered with the SEC. As previously mentioned, stocks traded on foreign markets may not report information in the standardized fashion the SEC demands. That means any stock research you need to conduct to make your investment decision may be limited in terms of information that is freely available and accurate.
About the Author - International Investing Opportunities
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