Global stocks are turning out to be more attractive for investors who prefer to put their eggs in different baskets rather investing in the US market alone.
The growing economies are also offering good investment returns. Market dynamics vary from one nation to other and so were the returns from the stock markets. Sometimes, the US market is sluggish, while other emerging markets are doing well and vice versa.
Exposure to the global markets would offer flexibility for investors to trade in the market that's attractive. Sometimes, the US market may be less attractive while other emerging economies have a huge potential for growth. Maybe the US market is doing very well when other emerging markets are suffering losses.
Ken Little in AboutMoney considers identifying the right foreign stock as a major hurdle in investing on foreign stocks. Next comes evaluating and actual buying of stocks. However, for the convenience of investors, there are several foreign stocks that are traded on the US bourses are available on par with other American companies.
There's a major advantage in the form of American Depository Receipts (ADRs). These ADRs facilitate trading in the foreign stock. Generally, US banks purchase a heavy chunk of foreign company's shares and reissue on the US stock markets. These shares are traded on the US bourses and one can easily identify such shares as they have ADR tag after the company name.
Meanwhile, Forbes observes that several American companies have spread their footprint outside the country and have established their business operations globally. S&P 500 global sales data for 2014 reveals that the portion of S&P 500 sales from foreign countries grew during the period, more particularly after suffering from sluggishness for five years.
The sales percentage from foreign countries was 43% 10 years ago and it was increased to 48% in 2014. Though the five percent growth may not be significant considering the span of 10 years, but it highlights the potential in foreign business among S&P 500 companies.
Another advantage of trading in foreign stocks is flexibility in currency conversion. One doesn't need to make any currency conversion in buying and selling except in certain cases such as pricing of the stock.
The share price of a company generally depends upon demand and supply, but mostly it follows the stock price being traded on bourses in the native country. T
The parity in currency exchange rates also offer advantages sometimes and disadvantages sometimes. For instance, the actual price of a stock is too low in the native country, and then US bank can have more shares so that one share of the ADR is equal to two or more shares of the stock.
Owning foreign stocks can also offer benefits such as exposure to globalization, diversification, and unexpected returns. On the other side, risks involved are currency exchange loss, political unrest, and inflation.
Join the Conversation