Foreign portfolio investment is a type of investment that an investor has abroad. A foreign portfolio investment can include a variety of different assets held in foreign countries, including bonds, stocks, and cash equivalents. They can be managed by finance professionals or directly held by an investor.
Most foreign portfolio investments are passively held by the investor. Though their liquidity does depend on the volatility of the foreign market in which they are held, foreign portfolio investments can be very liquid.
There are many benefits to having a foreign portfolio investment. It offers investors a way to diversify their holdings, and benefit from international investment diversification.
- Foreign portfolio investments are investments abroad.
- These investments can include bonds and stocks in a foreign country.
- A foreign portfolio investment allows several benefits such as access to a bigger market.
Foreign portfolio investment gives investors an opportunity to engage in international diversification of portfolio assets, which in turn helps achieve a higher risk-adjusted return. The global stock market operates in such a way that the factors that drive the London Stock Exchange at any given time are different from those that prevail in Taiwan, for example. This means that an investor who has stocks in different countries will experience less volatility over the entire portfolio.
Investors who have foreign investment portfolios have a broader credit base because they can access credit in foreign countries where they have significant investments. This is advantageous when credit sources available at home are expensive or unavailable due to various factors. The ability to get credit on favorable terms and as quickly as possible can determine whether a business executes a new project or not.
Benefit From Exchange Rate
International currency exchange rates keep changing. Sometimes the currency of the investor's home country may be strong, and sometimes it may be weak. There are times when a stronger currency in the foreign country where an investor has a portfolio may benefit the investor.
Access to a Bigger Market
Home markets in the United States have become very competitive, as there are many businesses offering similar services. Foreign markets, however, offer a less competitive and sometimes larger market. A business may make more sales selling shoes in one African country than in the entire U.S., for instance.
Where foreign portfolio investments are very liquid, they can be bought and sold quickly and easily. Higher liquidity means greater buying power for investors, as it gives them access to a ready stream of cash. That means that investors holding foreign portfolio investments are better-positioned to act quickly when good purchase opportunities arise.
Example of Foreign Portfolio Investment
Foreign portfolio investment occurs when a non-resident of a foreign country participates in a cross-border transaction with the aim of purchasing securities, cash equivalents, or other portfolio assets in that country. If a U.S.-based investor, for example, bought shares in a company based in Japan, that would be an example of foreign portfolio investment. It should not be confused with foreign direct investment, in which a non-resident provides financing for a venture in a foreign country, and receives an ownership stake and some degree of management control as a result.