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Should you go for foreign stocks?

By Charles Hopkins Published 03/13/2006 | Finance

If you are a player in the stock market you must have asked this question to yourself.  Foreign or global stocks seem quite lucrative to some investors but one needs to be aware of the benefits as well as the risks involved before investing in one. There are moments when the other economies are more attractive and show promise. But one of the problems faced while investing in a foreign stock is that of finding and evaluating a stock.

In case of domestic stocks you have access to detailed market research of the company: its growth prospects, recent earnings (through Annual Reports), Relative Strength (through several Investor Guides), Management, the corporate culture and Recent Insider activity. Such detailed information may be difficult to procure in case of foreign companies. But higher the risk, greater the gain. 

How do I benefit? 

o    Business is no longer limited to ones native country and one must take advantage of Globalization. Several East European countries show promise of good returns.

o    Though there are risks involved, an investor in foreign stocks also partakes of the windfall gains in emerging markets.

o    Investment abroad increases the options and provides you with the best alternatives; it also helps distribute some of the risk factors over several emerging economies. In this manner you can diversify your investments and provide a steadiness by not having all your securities influenced by the same factors.

What are the risks involved? 

       Procuring information about a foreign company   may be difficult compared to U.S. based companies. Moreover their accounting systems may vary, which shall make analysis and comparison even more complicated.

       Fluctuation in Currency rates can reduce profits even if the performance of the company is good. Your returns from the investment will be in the local currency, so when converted to U.S. dollars you stand to lose a portion of their value. The reverse situation may also take place, if the dollar weakens you gain on your investment. You need to evaluate so as to how the exchange rates will influence your profit.

       Inflation is another important factor. Only few countries are equipped to deal with rising inflation. Though investments in emerging markets seem apparently lucrative, inflation can reduce profits drastically.

       You need to be well informed about foreign tax treatment. Several countries impose taxes on foreign investors. Taxes are levied on the gains thereby bringing down your net-profit.

     The U.S. is generally undisturbed by factors like Political unrest, labor disputes and cultural disharmony, but they might adversely influence your investment abroad.


 

Risks may seem to outnumber the benefits but if you are a financial professional then you would consider investing in foreign stocks. What better way to diversify your portfolio than investing in foreign securities? There are quite a few foreign stocks that operate within the U.S. stock exchange and American Depository Receipts (ADR) enables you to easily locate the stocks, as all foreign stocks will have ADR after their name. While selling the stock  some currency calculation  is required otherwise  the stock trading takes place in U.S. dollars. So if you want to avail of the opportunities that the global market offers, invest in foreign securities.