Alternative Investments - International Investing

Stocks and bonds issued in countries outside the United States are considered riskier than domestic issues, but adding these investments to a portfolio can actually decrease the overall risk of the portfolio through added diversification. Here's what you need to know:

  • Emerging vs. developed markets
    • Developed markets include those countries with an established economy and securities market, such as most of Western Europe, Japan and Australia.

    • Stocks and bonds purchased from developed countries offer less risk than those from emerging markets, such as Latin America, Southeast Asia and much of Eastern Europe.

    • The potential returns from emerging market countries are attractive to investors with a tolerance for elevated risk.

The article What Is An Emerging Market Economy details emerging market economies and the potential rewards for investors willing to accept the additional risks.

  • Currency risk
    • Since foreign currencies can fluctuate against the U.S. dollar, an American investor may find the actual return on foreign investments to be enhanced or decreased.

    • When investors have assets in international investments, they face currency risk unless their positions are hedged.

    • The return earned by a U.S. investor with international investments is affected by both the change in the price of the investments and the foreign currencies' fluctuation against the dollar.

    • If the dollar strengthens compared to the foreign currency, the investor's returns suffer.

    • Since these exchange fluctuations are difficult to predict, currency exchange is an inherent risk in international investing.

  • Political risk
    • Foreign investments can be affected by wars and government actions, such as taxes or restrictions on currency exchange.

    • These factors tend to be a bigger risk in emerging market countries.

  • American Depository Receipts (ADRs)
    • Foreign corporations may choose to "list" their shares on U.S. stock exchanges by issuing ADRs.

    • This allows American investors to purchase the companies' shares without the companies having to register with the SEC.

    • Typically, a large U.S. bank with offices in the foreign country will purchase a large quantity of the stock, hold it in trust and then issue the ADRs, which are backed by the shares held in trust.

    • ADR purchasers receive no voting rights.

    • Dividends are declared in the foreign currency but converted and paid in U.S. dollars.

Thanks to ADRs, investors now have a world of investing opportunities to choose from. The tutorial ADR Basics examines these securities, as well as the associated risks and how their prices are determined.

Look Out!
Expect at least two questions on ADRs: typical incorrect answers include: "dividends are paid in the foreign currency", "ADR holders have voting rights like holders of any other stock" and "shares are held in trust at a foreign bank"

Exam Tips and Tricks
Consider this sample exam question:

The following statements about ADRs are all true, EXCEPT:

  1. They trade on U.S. stock exchanges.
  2. They enable U.S. investors to easily purchase international stocks.
  3. They pay dividends in the currency of the originating country.
  4. They represent shares of foreign securities held in trust in U.S. banks.

The correct answer is "c". ADRs pay dividends in U.S. dollars.

Real Estate Investments
Related Articles
  1. Professionals

    Career Advice: Financial Analyst Vs. Investment Banker

    Read an in-depth comparison about working as a Financial Analyst vs. working as an Investment Banker, two highly prestigious business careers.
  2. Professionals

    Who Needs to Take the Series 65?

    Most states require individuals to pass the Series 65 exam in order to act as investment advisors.
  3. Personal Finance

    RIAs and Brokers: What's the Difference?

    RIAs and brokers are held to different standards when providing investment advice. Here's how they differ.
  4. Investing Basics

    Brokers and RIAs: One and the Same?

    Brokers and registered investment advisors have some key differences. Here's what you need to know.
  5. Professionals

    Understanding Series 6

    Upon successful completion of the Series 6, an individual will have the qualifications needed to sell open end mutual funds and variable annuities
  6. Professionals

    Top Strategies on How to Become a Stock Broker

    Gunning to be a stock broker and want an edge? Here's some veteran advice.
  7. Trading Systems & Software

    Steps to Starting Up an Independent Broker Dealer

    Launching your own broker-dealer is a lot of work, but the potential payoff is great, both personally and financially.
  8. Professionals

    Understanding Series 63

    Series 63 is a securities license that entitles the holder to sell securities in a particular state.
  9. Professionals

    How To Answer Option Questions On The Series 7 Exam

    Learn how to answer option questions on the Series 7 exam. Pass your Series 7 exam with the help of these tips.
  10. Insurance

    Municipal Bond Tips For The Series 7 Exam

    Learn to distinguish between general obligation and revenue bonds to ace this test.
  1. Series 6

    A securities license entitling the holder to register as a limited ...
  2. Series 79

    A examination to ensure a candidate is qualified to become a ...
  3. Research Analyst

    A person who prepares investigative reports on equity securities. ...
  4. Series 34

    An exam required for individuals seeking to engage in off-exchange ...
  5. Financial Advisor

    One who provides financial advice or guidance to customers for ...
  6. Series 28

    An exam given by the Financial Industry Regulatory Authority ...
  1. Is a financial advisor required to have a degree?

    Financial advisors are not required to have university degrees. However, they are required to pass certain exams administered ... Read Full Answer >>
  2. Do financial advisors have to be licensed?

    Financial advisors must possess various securities licenses in order to sell investment products. The specific products an ... Read Full Answer >>
  3. If I have only a limited amount of time to study for the Series 6, what should I ...

    The Series 6 Investment Company and Variable Contracts Products Representative Qualification Examination is administered ... Read Full Answer >>
  4. What role does the 'chip cycle' play in the electronics sector?

    There are several highly acclaimed private Series 6 Exam courses in the United States. Many can be completed online. Popular ... Read Full Answer >>
  5. What does passing the Series 6 enable me to do?

    The Series 6, or the Investment Company Products/Variable Contracts Limited Representative, exam is administered by the Financial ... Read Full Answer >>
  6. What are the differences between the Series 6 exam and the Series 7 exam?

    The Financial Industry Regulatory Authority (FINRA) offers a variety of licenses that must be obtained before conducting ... Read Full Answer >>
Hot Definitions
  1. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  2. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  3. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  4. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  5. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
  6. Discount Bond

    A bond that is issued for less than its par (or face) value, or a bond currently trading for less than its par value in the ...
Trading Center