Your Wealth, Health, And Lifestyle Newsletter

Should You Invest In A Foreign Company?

By Jason Markum

Investing in the stock market can be an enormous amount of fun, as well as highly profitable if you know what you’re doing. But investing in the same stocks year after year are can get to be a little boring, especially if you invest in the same safe blue-chip type stocks that many responsible investors tend to invest in.

Many people choose to shake things up a little bit and invest in foreign companies. There are many legitimate reasons to do this besides the excitement and fun of diving into new territories. One very legitimate reason is diversification. You can invest in many different stocks on the US stock exchanges, but the fact of the matter is, they are all still American stocks and thus un-diversified to a large degree. This is because market forces affect all stocks to some degree or another. So for instance, if the US economy goes down, all stocks on the stock exchange in the United States will drop in varying degrees.

Another perfectly legitimate reason to invest in foreign stocks is – increased growth potential. Many staid blue-chip stocks in America move very little when it comes to price from one year to the next. They’ve already used up their growth potential. This is not the case for many foreign stocks especially stocks in emerging markets such as China or India.

Investors looking for oversized gains have done quite well in the past investing in these foreign stocks of emerging market companies.

No matter what your specific reason is for wishing to invest in foreign stocks, you should be aware of several risks that are involved before making a final investment decision and I’m going to talk about two or three of those risks in this article today.

The first risk is currency fluctuation. If you want to buy the stock of a company that resides in a country whose currency falls against the dollar, then any gain in share price is reduced by the currency loss.

The second risk is information. We get used to having clear information handed to us here in the United States because we have the securities and exchange commission who make sure the companies don’t lie to us. Many foreign companies do not have such oversight checks and balances and foreign governments often don’t require as much information be given to shareholders as the United States does.

Finally the third risk has to do with volume. In America millions, sometimes billions of shares are traded every single day making it easy to get in and out of a particular stock. Many foreign stock exchanges do not have such high volume making it harder to buy and sell shares within specific price ranges. Sometimes, in fact, large purchases in a single stock can sway the entire stock market of the country which is something you need to be aware of.

Investing in the stock of foreign companies can be exhilarating as well as profitable. Just be sure to do your homework and watch out for the three risks that I mentioned today and you should be just fine.

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