Stock Investing in Foreign Markets
May 12, 2019
One way to add additional diversification to a stock portfolio is to invest in companies of foreign countries. Although this minimizes the overall risk of the stock portfolio it typically exposes the investment to more risk or fluctuations.
- Dealing in foreign currencies adds additional risk.
- Might increase fees from your broker.
- Can add currency exchange fees on top of trading fees.
- Different markets might have different regulations regarding financial oversight, taxes and reports.
- When tracking the performance of your stocks you have to separate the performance of the company stock from the currency.
Why invest in foreign markets?
There are a few good reasons to diversify into foreign markets.
First, if you are living outside the US it is obviously the best way to invest in fast growing technology companies. It’s typically favorable to invest directly in for example Alphabet or Microsoft directly at the NASDAQ instead of dual listings on your local market. The main reason is that the main listing have much larger volumes/liquidity so it is easier to buy and sell stocks.
But even if you live in the US you should take a good look at companies of foreign markets. For example the Australian (ASX), UK or German markets should be a good way to minimize the risk from a short term US correction.
Discovering foreign Stock Opportunities
There is not a big difference to discovering investing opportunities in your home market. In today’s world chances are you are regularly interacting with foreign companies. From Adidas to Volkswagen in the German market, HSBC, BP and Unilever in the UK market (FTSE) or even Softbank, Toyota or Sony in the Japanese Market (TYO). Keep an eye out for news of foreign companies, and maybe check the 52 week lows or highs charts to find investing opportunities.
Check our article about how to find new investing ideas.
Foreign Currency Considerations
The biggest hurdle for keeping track of foreign stocks is to calculate in currency exchange rates. So in addition to the ups and downs of the value of the companies you invest in you will experience changes of currency conversion.
Usually you want to keep track of the performance of your stocks to know how your investment thesis holds true. In this sense looking at the price of your shares in your home currency is probably quite distracting from the real development. So you should also look at the reports in the native currency of the foreign stock exchange.
Fees, Taxes and regulations
Since you are dealing with companies and markets outside your home country you can’t expect them to follow the same regulations. So you obvious can’t expect your quarterly and yearly SEC filings from stocks listed outside the US jurisdiction.
So you might want to find out what the local regulations are, bit typically nowadays you can be pretty certain that every bigger market has similar rules. For example there is the “Financial Services Agency” in Japan and the “Bundesanstalt für Finanzdienstleistungsaufsicht” for Germany. Similar to annual reports to the SEC German companies have to publish their reports publicly as well and can be searched at bundesanzeiger.de.
Another thing to keep in mind is that your broker might charge extra fees for transactions in foreign such exchanges, even if he actually supports them in the first place. So make sure you understand what your broker realistically allows you.
In addition you should make sure if there are any additional taxes in the country you want to invest and trade in. And whether there are double tax agreements between your home country and the country of the exchange you are trading in. Typically your broker should charge any country specific taxes, but if there are treaties in place you might be able to be exempt from some taxes. So you might want to get in touch with your broker or accountant.