How to invest in Foreign Stocks
During the early 1990s, American investors rushed to invest globally
at a time when the U.S. stock market had hit an impasse, and the foreign
stock markets were flourishing. This was particularly true of
emerging markets, where investors saw spectacular returns over
short periods of time. However, with the political and economic turmoil
in Asia and Latin America, these gains turned into spectacular
losses, which tempered the flow of money abroad. This scenario
changed in the 2000s, when foreign stocks have outperformed many
of their U.S. counterparts.
There are a number of different ways for U.S. investors to
* Buy foreign stocks listed on foreign exchanges.
* Buy foreign stocks trading in dollars as ADRs.
* Invest in ETFs.
* Invest in international and global mutual funds.
* Invest in country funds, mostly closed-end mutual funds.
Foreign Stocks on Foreign Exchanges
Investors can buy shares of foreign companies that list on foreign
exchanges, which is the riskiest of the four methods to invest internationally.
The additional risk, over and above the different types of
risk mentioned in the preceding section, include differences in trading
regulations of foreign brokers and their exchanges. There
is little recourse open to U.S. investors as to the protection of their
investments from unscrupulous practices in many foreign countries.
High fees (transaction costs, which are higher than those
charged for trading U.S. stocks, and other additional fees such as
foreign withholdings taxes) may be imposed, which could erode
potential profits. In addition, lags in time and information may
make it difficult for investors to determine when to buy and sell.
Without the benefits of daily information about these foreign companies
and industries, investors may not be able to make timely
transaction decisions. This pertains particularly to companies
whose stocks are not quoted in U.S. newspapers. For example, some
of the smaller South African mining companies that are quoted on
the Johannesburg Stock Exchange in rands (the local currency) are
not reported in the U.S. financial newspapers. With the lack of daily
information (unless a call is placed on a daily basis to the foreign
broker), an investor might miss any news announcements, making
it difficult to buy or sell on a timely basis.
Afew major brokerage firms are making it easier for investors
to buy shares listed on foreign exchanges. E*Trade Financial
Corporation plans to make it possible for its investors to trade
stocks listed in Japan, Canada, Hong Kong, and European countries
in local currencies in 2007. Charles Schwab Corporation cut its
brokerage fees for investors buying foreign stocks, and Fidelity
Investments increased its brokerage services to facilitate customers’
orders of foreign stocks (Lucchetti, 2006, p. B1).
Another development that has made it easier for customers
to invest directly in foreign stocks is the merger activity of the stock
markets. For example, the New York Stock Exchange (NYSE) proposed
a merger with Euronext NV, the European exchange operator
(Lucchetti, 2006, p. B1).
Nevertheless, buying foreign stocks listed on foreign exchanges
should be left to more experienced investors who not only
are knowledgeable about the foreign companies and their industries
but also have access to daily information about them and are
familiar with the different trading practices. Japanese stocks, for
instance, trade at very much higher price/earnings (P/E) multiples
than American stocks, and industry statistics in foreign countries
are not easy to come by. It is difficult enough for most investors to
select stocks trading on the American exchanges; direct investment
in foreign stocks may be likened to navigating a mine field in the
dark while riding on the back of an elephant.
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