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 invest abroad:
* 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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