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 <?xml:namespace prefix = st1 /?>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.
The Advisor Insight
ADR stands for "American Depository Receipt," and it's a way of making hard-to-trade foreign stocks available to investors in the United States. Buying and selling ADRs lets you participate in foreign markets without having to deal with unfamiliar currencies, foreign taxes, and inconvenient per-share prices.
Capital Strength Investments LLC
O Fallon, IL