Investments in stocks have been a popular topic in recent years, as many people constantly seek ways to generate passive income by exploring different investment options. However, investment opportunities extend beyond geographical borders and anyone can invest in stocks within and outside their country.
Investing in international stocks goes a long way, as it not only adds to the diversification of your portfolio but also helps reduce your risks. A study by Nationwide Financial shows that the optimal allocation to foreign stocks — when returns are maximized and portfolio volatility minimized — is 40% and U.S. investors allocate about 22% to foreign stocks on average.
Stock returns vary around the world; if the returns do not favor you in your location, you could have an investment that is doing well elsewhere. The NZ stock trading exchange is an example of how most people get involved with foreign stocks.
If you are curious about how to get started with investing in foreign and international stocks, we have put together some tips to guide you. Below are some of the ways to invest in foreign stocks:
1. Understand the Risks of Foreign
Most people would rather stick to local stocks, as they are scared of the unknown. However, you can get familiar with the risks associated with foreign stocks to get you started on a smooth journey. Some of these risks include higher transaction costs, currency volatility, and liquidity risks. The U.S is known to have the largest stock exchange in the world, which increases your liquidity risks, as you may have a short time window to sell your stocks quickly enough. While these risks are valid, understanding them will help improve your experience with foreign stocks.
2. Choose the Right Medium
There are different ways to trade foreign stocks today, including the American Depository Receipts (ADR) and the Global Depository Receipts (GDR). The ADRs make the process of buying stocks more convenient and are also used by foreign companies to establish a U.S. presence. The GDRs, on the other hand, focus on issuing shares of foreign companies in international markets to people within and outside the U.S.
3. Use Exchange-Traded Funds (ETF) Exchange traded funds (ETF) contain various investments including stocks and are a great way for investors to access foreign markets. Picking the right exchange-traded fund can improve your investment experience. You can determine the right one by checking the minimum level of assets the ETF has- with a common threshold of at least $10 million, the trading activity, market position, and trading errors, among others.
4. Invest in Global Mutual Funds
You might have been familiar with mutual funds before now but in the case of a Global Mutual Fund, the fund is invested in companies located anywhere in the world. How they work and the benefits they offer are similar to other kinds of mutual funds.
There are many investment options for everyone today but what is most important is making the right choice and having a better understanding of how it works before delving into it.