Foreign stock markets can serve as a great way to help expand the types of companies you invest in. However, they also have many pitfalls that you should carefully consider first before deciding to invest in them. The purpose of our article is to teach you what a foreign stock market is and to offer some helpful tips to help you make the best financial decisions possible.
What Is a Foreign Stock Market?
In short, a foreign stock market is an index of stocks that are traded in a different country. These stocks are sold in various stock exchanges all around the world. Some prime examples of stock market exchanges in larger foreign countries include the Japan Exchange Group, Shanghai Stock Exchange, and the.
Each of these stock exchanges is subject to their own regulatory rules just like in the United States. With some of the markets in emerging countries, the amount of government oversight can be somewhat limited compared to what is commonly seen in larger markets. Now it is time to go through our 7 tips that will help you get to know foreign stock markets better.
1) Remember the Golden Rule of Investing
Just like stocks in the United States, it’s important that you follow the golden rule when investing in foreign stock markets. Most financial advisers recommend investing with long-term growth in mind. You should look for stocks that have performed well over a given period of time.
In addition, you should try to find information on the prospective companies you are interested in investing in. This can b an attempt to make sure that they have a stable business platform. By using these simple strategies, you can help minimize potential losses when investing in foreign markets.
2) Understand Foreign Tax Implications
Another tip to consider when investing in foreign stock markets is that you should always consider the implications of foreign taxes on your investments. When investing in certain markets, the tax rate can be quite high on many different types of financial products.
A prime example is Italy. This is the country where foreign investors are hit with a 20 percent foreign tax credit according to Investopedia website. To make matters worse, these taxes are charged in addition to your standard capital gains rates in the United States.
On the plus side, you can often write off many of these types of charges. Your best timing is when tax time comes to reduce your overall tax debt. Just remember to consult with a CPA or other licensed professional if you have any questions.
3) Minimize Risks with Diversification
One of the best tried and true strategies for investing is portfolio diversification. This strategy is perfect for investing in foreign stock markets as well as domestic ones in the United States. With diversification, the goal is to spread out your investments across a wide range of different business sectors.
In addition, many users decide to invest in other financial products like bonds to further diversify their investment portfolio holdings. This strategy is particularly important for investors who mainly tend to invest in riskier business sectors like telecommunications and pharmaceuticals. By spreading your investments across many different business sectors, you decrease the likelihood that your entire portfolio will decrease in value due to sector-specific crisis events.
4) Be Wary of Emerging Markets
While it may be true that with greater risks comes the potential for greater rewards, you should also be wary of emerging markets. The primary reason you should proceed cautiously is that newer markets are far less likely to be regulated heavily.
In the United States, companies that participate in the major stock markets are required to file periodic disclosures of their financial dealings. These disclosures give investors valuable insight into the financial strength and inner workings of these companies. With many foreign stock markets, companies are not required to disclose this type of information.
This is why you should always try to research background information on your own beforehand to help eliminate investments that are not a good fit. Some great things to look for are the number of years the company has been in business, the types of products they sell, and how long their executive team has remained stable.
5) Don’t Forget Currency Fluctuations
Another tip to remember when investing in foreign stock markets is the impact of currency fluctuations. When investing in foreign stock, you will be purchasing the stock in the local currency. This means that buying a stock where the U.S. dollar is worth more is often advantageous for investors since it increases your overall buying power.
Unfortunately, the opposite can happen where the dollar can drop in value relative to the foreign market’s currency resulting in a loss for the investor. You also have to consider that certain markets may impose currency restrictions during financial downturns that can result in delays in receiving your cashed out holdings.
6) Consider ADRs
A great beginner tip to consider when investing in foreign stocks is to stick with ADRs. ADRs, short for American Depository Receipts, are a type of foreign stock that is sold on United States financial markets. These types of companies are generally much larger than other listings you will find on foreign exchanges.
The biggest benefit to investing in these types of stocks is that they are subject to the same reporting standards as other United States stocks. This greatly reduces the risks to investors by offering much more insight into the inner workings of the traded company.
7) The Benefits of Mutual Funds
If you’re still really nervous about investing in foreign stocks yourself, a great option to consider is mutual funds. With mutual funds, your investment is automatically allocated over a wide range of financial products that the fund managers have selected. These types of funds can include stocks, bonds, and other financial products.
They offer automatic diversification of your investments and are actively managed by a group of professionals. With mutual funds, you can select accounts that focus primarily on foreign stocks and other emerging markets. While these account types may have slightly fewer risks than investing on your own, it’s important to remember that they can still experience quite a bit of volatility.
Just like any investment, foreign stock markets have their own unique advantages and disadvantages. While generally having much more potential for growth, you have to do a lot more research before making a final investment decision. Just remember to follow our 7 tips to help minimize your risks while investing. If you have any foreign stock market investment tips you would like to share, feel free to post them in the comments section below.