Foreign markets have always been an object of envy to domestic investors because the indexes in some foreign countries have produced double- to triple-digit returns in the past. For example, the SETI 100 in Bangkok rose 117% in 2003, and Russia's RTS Index gained 72% in the first nine months of 2005. The very high returns in foreign markets lead investors to look for ways to invest in them.
There are a few ways to invest in foreign markets. The direct approach is to buy stocks in those countries. However, buying shares that trade on exchanges outside of your home country or that of your broker can be harder than trading domestic shares. If you are looking to invest in a foreign company listed on a foreign exchange, the first thing to do is to contact your brokerage firm and see whether it provides such a service. If it does, the firm will need to contact a market maker or an affiliate firm located in the country in which you want to buy the shares. However, even if the firm provides this service, it may not be able to gain access to the specific shares you want. In that case, the alternative would be to try to set up a brokerage account with a firm in that foreign country.
If you find a way to invest in other countries, you must also understand the risks associated with foreign investment. First of all, timely and accurate information about foreign companies is not available to the same degree as it is in the U.S. Another concern is that the regulations in foreign countries can affect both your investments and any accounts set up in that country. For example, there may be restrictions on your ability to transfer funds from your foreign account to one in your home country, or your funds may be taxed whenever you try to take them home. Being informed allows you to carefully weigh the risks and benefits of investing in a particular foreign market.
Investors can also use instruments such as mutual funds or exchange traded funds (ETFs) as less risky ways to gain exposure to foreign markets. (To learn more about mutual funds and ETFs, see our Mutual Fund Tutorial and Introduction To Exchange-Traded Funds.) There are many of these investment products that cover a wide range of regions around the world, such as Latin America or Asia Ex-Japan. These instruments can be actively managed or tied to an exchange, but in either case, they offer both exposure to a country and diversification and management expertise. They can also be easily purchased through any discount or full-service broker.
(To read more, see Pros and Cons of Offshore Investing, Investing Beyond Your Borders.)
The envy of rising Chinese & Indian stock markets has many people contemplating how to invest directly in those markets. First of all, it’s almost impossible because they have many layers of restrictions from both domestic and foreign markets regulations. Secondly, even if you find some brokers who have the platform to do the trade, the cost can be exorbitant. Every bit fees will eventually add up and erode your return. Thirdly, comparing to many other countries, the U.S. and other developed markets have tougher and stricter rules and regulations in place; whereas emerging markets are Wild West for financial regulations. If you recall, last July when Chinese official announced major restrictions on trading and halted IPOs, half of the entire stock market froze. The situation was so murky that no one knew what the Chinese market was doing since the suspensions of trading and made it impossible to determine stock price. On the other hand, on this side of the world, the U.S.-based Chinese ETFs were actively trading. Like many investors, no one likes to be in the dark to play your hard-earned money. Partner up with a professional who can learn your goals, risk tolerance, and find the funds from a vast investment mutual fund and ETF universe to suit your needs. Cheers!
Trading individual stocks in these countries can be tricky. If you decide to go this route, I suggest using a good mutual fund or ETF (Exchange Traded Fund). This way, you are not putting all of your eggs in one basket as you would be owning more than one company.
As with any investment, be sure you understand the risks and costs involved before investing.