Globalization has led to some exciting developments. Markets around the world are now much more connected than they were before, allowing businesses and investors a chance to tap into investment opportunities they could never access from a distance. Countries like China and India that were once closed to foreign investors, now present great growth potential for people who want to park their money beyond their own borders. These developing economies are on pace to compete with the U.S. as the world's largest economy. But getting into these markets may prove to be tricky.
So what's the best way of putting your money into foreign markets like China or India? Read on to find out more about how you can tap into these parts of the world.
- Buying stocks directly in a foreign market like India or China is possible, but may be harder than purchasing domestic shares.
- Investors can purchase American Depository Receipts on U.S. exchanges, which are certificates that represent shares in a foreign company.
- China A-shares are now open to foreign investors.
- Mutual funds and ETFs are less risky ways to gain exposure to foreign markets.
How to Approach Foreign Markets
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 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.
ADRs and A-Shares
One way to tap into the foreign market is to look into American Depository Receipts (ADRs). These are certificates issued by U.S. depository banks that represent a specific number of shares in a foreign company. These certificates or receipts trade on American exchanges just like regular stock. They trade in U.S. dollars, so there are none of the usual hassles that stem from foreign exchange. The underlying assets are held by the U.S. bank or financial institution overseas. And just like domestic publicly-traded companies, these foreign corporations are required to provide U.S. banks with regular, updated financial statements.
If you're looking to invest specifically in Chinese companies, you can now do so through A-shares. These are shares of companies from mainland China that are listed on the Shanghai and Shenzhen Stock Exchanges. Because of China's restrictions on foreign investment, these shares were only available to Chinese investors. But that restriction was lifted in 2003.
Understand the Risks
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.
Look to Alternatives
Investors can also use instruments such as mutual funds or exchange traded funds (ETFs) as less risky ways to gain exposure to foreign markets. 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 learn more about mutual funds and ETFs, see our Mutual Fund Tutorial and Introduction To Exchange-Traded Funds.)
Capital Strength Investments LLC, O'Fallon, IL
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.