Two of the chief reasons why people invest internationally are:
- Diversification. International investing may help U.S. investors to spread their investment risk to companies and markets that are outside of – and different than – the U.S. economy
- Growth. International investing takes advantage of the potential for faster growth in markets outside the U.S., particularly in emerging markets.
But there are special risks of international investing, including:
- Changes in currency exchange rates. When the exchange rate between the U.S. dollar and the currency of an international investment changes, it can increase or reduce your investment return.
- Dramatic changes in market value. All markets, including those outside the U.S., can experience dramatic changes in value.
- Political, economic, and social events. It is difficult for investors to understand all the political, economic, and social factors that influence markets, especially those abroad.
- Lack of liquidity. Markets outside the U.S. may have lower trading volumes and fewer listed companies. They may only be open a few hours a day. Some countries restrict the amount or type of stocks that foreign investors may purchase.
- Less information. Many companies outside the U.S. do not provide investors with the same type of information as U.S. public companies, and the information may not be available in English.
- Foreign laws. If you have a problem with your investment, you may not be able to sue the company in the U.S. Even if you sue successfully in a U.S. court, you may not be able to collect on a U.S. judgment against a non-U.S. company.
How can I invest internationally?
- American Depositary Receipts. The stocks of most non-U.S. companies that trade in the U.S. markets are traded as American Depositary Receipts (ADRs) issued by U.S. depositary banks. Each ADR represents one share of stock in a company outside the U.S. If you own an ADR you have the right to obtain the stock it represents, but U.S. investors usually find it more convenient to own the ADR. The price of an ADR corresponds to the price of the stock in its home market, adjusted for the ratio of ADRs to the company’s shares.
- Mutual Funds. One way to invest internationally is through mutual funds. Mutual funds provide more diversification than most investors could achieve on their own. The fund will handle currency conversions and pay any foreign taxes, and is likely to understand the different operations of non-U.S. markets. There are different kinds of funds that invest internationally.
- Global funds invest primarily in companies outside the U.S., but may also invest in U.S. companies with international operations.
- International funds generally limit their investments to companies outside the U.S.
- Regional or country funds invest principally in companies located in a particular geographical region, such as Asia or Europe, or in a single country. Some funds invest only in emerging markets while others concentrate on developed markets.
- International index funds try to track the results of a particular international market index. Index funds differ from actively managed funds, whose managers pick stocks based on research about the companies.
- Trading on Foreign Markets. If you want to buy or sell stock in a company that only trades outside the U.S., your broker may be able to process your order for you. These companies do not file reports with the SEC, so you will need to rely on other sources of information to make an investment decision. Always make sure any broker you deal with is registered with the SEC. It is against the law for brokers outside the U.S. who are not registered with the SEC to call you and solicit your investment.