Investors are often advised to look to international markets for good investment opportunities, because of the potential for increased returns on their portfolio and to diversify their risk. However, although the benefits of investing internationally are widely accepted, many investors are still reluctant. There are many important factors to consider.
Currency Volatility
One key area of concern for investors is in the area of currency volatility. When investing directly in a foreign market, you have to exchange your domestic currency into a foreign currency, at that days exchange rate, to buy the foreign stock. You will convert it back to your own currency, when you sell the stock. The uncertain future exchange rate scares many investors.
A solution can be to hedge your currency exposure, but not many retail investors understand the tools used to do this. Currency futures, options and forwards are usually best exploited by experts like Mark J. Leder, who know how to utilize the right products, to hedge currency risk.
Liquidity Risks
A high on the list concern for overseas investors is liquidity risks. This means that there is a risk that you cannot sell your stock when you issue a sell order, due to not enough activity in the stock. This can lead to an inability to get your sell price, or your not being able to sell the stock in a timely manner or at all. The best time to evaluate liquidity risk is before you purchase the stock. The most common approach is to observe the bid-ask spread and the stock’s volume over time. Is the bid-ask spread narrow, and is there a lot of activity in the stock over time? If the answer to both is yes, this means there is a good chance you will be able to get out of the stock when you choose.
Cost of Buying and Selling the Stocks
Transaction costs present the biggest barriers to entry in overseas stock investing. Compared to domestic rates, brokerage commissions are almost always higher in international markets. Also, there are often extra charges on top, that vary based on the local market.
If you are investing through a fund or professional manager, also expect to find higher fees. Fund managers need to spend considerable time researching and becoming familiar with a foreign market. Expect those costs to be passed on to you.
Things to Remember
Making investments overseas can be a great way to diversify your portfolio and dramatically increase your investment returns. But for the retail investor, finding your way through the challenges mentioned here, and the potential maze of regulations, fees and overseas laws can be tricky and challenging. If you have an interest in going down this path, take the time and learn the subject. There are other risks associated with these types of investments, but the ones listed here are the key ones for you to research first.