Should you be investing in foreign markets? If you’d like to grow your portfolio and take maximum advantage of available opportunities to make profits, then the answer is yes.
Many investors shy away from foreign markets because they’re unfamiliar with them. Others feel that they’ll be risking too much by stepping outside their domestic markets.
However, just like with your domestic market, you can successfully break into any foreign market with the right strategy. But before investing in foreign markets, it’s crucial to familiarize yourself with their various advantages and disadvantages.
That way, you can decide whether investing is worth it or not. In this post, we’ll tackle some basics on how to invest internationally, then look at 11 vital investing in foreign markets pros and cons you must know.
Table of Contents
- How to Invest in Foreign Markets
- Examples of Foreign Markets to Invest In
- Stock Market
- Real Estate Investment Trust (REIT?)
- How Much Should You Invest in Foreign Markets?
- 7 Pros of Investing in Foreign Markets
- Future Growth
- Faster Growth
- Lower Production Costs
- Currency Protection
- More Opportunities
- Limits Country Risk
- 4 Cons of Investing in Foreign Markets
- Poor Regulation
- Political Risks
- Currency Exchange Rate
- Double Taxation
How to Invest in Foreign Markets
So, how is it possible to invest in foreign markets?
Figuring out how to register and invest in foreign markets is the first step towards establishing international investments. Fortunately, the process is easy, and you don’t need to worry about the distance or language barrier.
Some ways to invest in foreign markets include through:
- Stock Markets
- Mutual Funds
- Investment Trusts
Investing through these means is easy since you can do it from your home country. The key is to find a registered and trusted broker through whom to place your investments.
Examples of Foreign Markets to Invest In
The stock market and real estate investment trusts (REITs) are two examples of foreign markets you can invest in. They are also some of the best Investments for foreigners to try because they’re easy to trade and have the potential for high returns.
Alibaba Group is China’s leading online retailer, and you can trade its stock on the New York Stock Exchange market. Yandex is a major Russian intelligence company listed on NASDAQ, the same as Baidu, China’s leading search engine.
Here are three different ways to trade the stock market:
Foreign Direct Investing
In foreign direct Investing, you buy the stocks you’re interested in directly. This means you’re in charge of everything, from selecting the stocks to trade in, how much, and when to invest.
To do this, you’ll need to open a trading account with a broker in either your home country or a broker from your target country. When choosing a broker, ensure that they’re registered with recognized regulators in the market.
When you decide to engage in stock market foreign direct Investing, you should be ready to conduct extensive research to avoid taking costly risks.
You can easily trade stocks directly through smartphone apps such as Robinhood and Charles Schwab. Robinhood app offers commission-free trading opportunities with no fees and restrictions.
Charles Schwab also allows stock traders to invest with zero commission. The app also provides industry insights to help you make informed investment choices.
Global Depository Receipts
Global depository receipts offer a way to invest in publicly traded shares belonging to a foreign company. The shares are issued by a bank and traded on a local stock exchange market.
Global Mutual Funds
A mutual fund utilizes money from many investors to invest in securities. A global mutual fund deals with international equities, allowing you to trade in companies in various countries.
Unlike foreign direct investing, you don’t have to worry about what shares to buy and when. A fund management team handles all investments, and then earnings are distributed among investors.
See Related: Best Globalization Jobs & Careers
Real Estate Investment Trust (REIT?)
Buying and managing real estate property in a foreign country requires massive capital that only a fraction of wealthy individual investors or companies can manage.
Fortunately, a real estate investment trust market allows you to invest in commercial properties without engaging in their purchase or management.
A REIT has a management team in charge of purchasing and managing commercial properties.
When you buy shares in a REIT, you become an investor and earn dividends from revenue generated through rent. A real estate investment trust may own and manage warehouses, hotels, shopping centers, and office buildings.
You can purchase REIT shares in various ways, depending on where their securities are held. Many REITs are publicly traded and listed on national securities exchanges, making them easily accessible to individual investors. Like stocks, you can buy them through a broker.
There are also REITs available to the public but not listed on any securities exchange markets.
These are known as public non-traded REITs, and they’re registered with the Securities and Exchange Commission. These too can be bought by individual investors, but note that the fees involved may be higher than those of listed REITs because of the limited market.
Finally, we have private REITs, neither traded on national securities nor registered with the Securities and Exchange Commission. Only institutional investors or accredited investors can buy private REITs.
Arrived Homes and EquityMultiple are two investment apps you can use to buy REIT shares. With Arrived Homes, you can buy rental property shares with an investment of as little as $100.
EquityMultiple has a $5000 minimum investment limit, but they have one of the widest variety of multi-tenant properties you can choose to invest in.
Types of REITs
There are different types of real estate investment trusts, with the distinction being in the range of properties they trade in.
An equity REIT buys properties and then generates income through rent. This is the most popular type of real estate investment trust.
While some equity REITs specialize in a particular property type, others invest across various sectors. For instance, a REIT may focus on hotels alone, while another may purchase and rent out office buildings, shopping malls, hospitals, and more.
Unlike equity REITs, mortgages real estate investment trusts don’t buy and rent properties. Instead, they generate income by selling mortgages to real estate companies. Their earnings come from the interests paid on the mortgages.
Hybrid REITs invest in both physical properties and mortgages to generate income for investors. Before settling on a REIT to invest in, thoroughly research their investment strategy and the sectors they’re involved in.
You’ll also need to consider the local economy of the country where the properties are located since this has a significant impact on the sector’s performance.
See Related: Best Ethical Mortgage Lenders to Consider
How Much Should You Invest in Foreign Markets?
How much you invest in foreign markets depends on your resources and what you’re willing to risk. As with any investment, it’s crucial to calculate your risk before getting into the market.
Some foreign markets may have a good outlook, but this doesn’t mean you should go all in expecting big profits. Take your time to study the foreign country’s economy and the particular sector’s performance before channeling any of your money.
Until you fully understand the market trends and the factors that influence them, it’s advisable to avoid making significant investments.
7 Pros of Investing in Foreign Markets
There are several pros of investing in foreign markets. Below, we have listed seven that you should know:
As an investor, it’s important to have a diversified portfolio.
A diversified portfolio ensures that if one of your investments hits a rough patch, it isn’t the end of the road for you. This is one of the greatest benefits you’ll enjoy by investing internationally.
When the local economy is performing poorly, your domestic investments will suffer. But, a weak local economy doesn’t mean the rest of the markets globally are underperforming.
Therefore, if you have investments in countries whose economy is going strong, you’ll be able to get good profits from some of your investments.
See Related: Important Pros and Cons of Globalization
Currently, the U.S and the EU have a significant impact on the global economy, and you have much to gain if you invest in them wisely. But have you considered countries that are emerging as significant economies?
Taking a step from the established market in your home country into a developing one holds the promise of future growth that could bring more returns than sticking to dominant economies.
Doing this is also important because while your home market may have been strong for many years, this will not always be the case, so it’s important to look elsewhere and take advantage of upcoming markets.
One of the biggest advantages of investing in a well-established home market is less risk. But, markets known for their stability have already developed a lot, which means their growth rate is slow.
If you decide to invest in an emerging foreign market, you will be exposed to more risk, but you’ll see greater profits much faster than in a fully-developed market. It’s up to you to develop a sound strategy to protect your investment against most of the risk and increase your chances of success.
Lower Production Costs
One of the ways companies invest in foreign markets is by introducing their assets. Often, these assets are meant to take advantage of production costs that are much lower than in their home country.
By doing this, you can keep prices low for consumers and reduce your cost to profit ratio. Many U.S. companies invest assets in Asia for this reason.
The weaker your domestic currency gets, the more value your investments lose.
Diversifying into foreign markets is one way to protect yourself against this. In a situation where your domestic currency’s value is dropping, you’ll benefit from having investments in a country whose currency is growing stronger.
Every country lacks a particular market sector that’s doing very well somewhere else. For instance, your home country may not have a significant mining industry, which means there are few opportunities to invest and get good returns.
On the other hand, there are many countries with a thriving mining sector traded on the stock market. This applies to many different industries such as tech, health, and travel.
By sticking to your domestic market, you’ll be missing out on all the other markets out there. Investing in foreign markets presents more opportunities and allows you to take advantage of well-performing sectors in other countries.
Limits Country Risk
If you have all your investments in your home country, it’s possible to lose all of them at once due to one event, such as political unrest. Investing elsewhere reduces your exposure to adverse events that can weaken your country’s economy.
Things you can avoid with foreign investment include high taxes, recession, and a debt crisis. When investing internationally, be careful to choose markets that don’t offer the same risks as your home country to avoid a double tragedy.
4 Cons of Investing in Foreign Markets
While there are many advantages to investing in foreign markets, you must beware of the following cons:
Not every market is well regulated, and it’s possible to find that a foreign market you’re interested in has much lower standards than the one at home.
Most emerging markets in developing countries present this disadvantage. Poor regulation means more risks, which is a turn-off for many investors. Before getting into any foreign market, do your homework and discover what regulations are in place to protect your investments.
Political unrest is a major issue in most developing countries, making their emerging and fast-growing markets riskier. In times of political stability, it’s possible to get good returns. But when the situation changes, you risk losing your investments in a short period of time.
Therefore, it’s crucial to stay updated with your target country’s political status when making investments. This way, you can only invest in countries with more stability or identify a good exit point when there’s a high risk of political strife.
Currency Exchange Rate
The exchange rate can be a disadvantage when it’s time to convert your foreign investment earnings into your local currency. The exchange rate fluctuates all the time, and it’s possible to lose a considerable amount of your profits.
When making foreign investments, there’s a chance that you’ll be taxed twice: first in the country of your investment and second in your home country when you receive your earnings.
One way to prevent this from being a huge disadvantage is by investing in markets that give higher returns, minimizing double taxation. Another is by targeting countries that offer tax relief to foreign investors.
Foreign markets come with their set of risks, but they also provide earning opportunities you might not find in your home country.
The key to finding the best performing foreign markets to invest in is considering your investment objectives, and factoring in the country’s economy, political stability, and other aspects that could affect your investment.
You’ll do well to look into emerging and fast-growing markets such as India, Brazil, and China when looking for optimal investment opportunities.
- What is Social Arbitrage Investing?
- Important Pros and Cons of Private Equity to Know
- Does Sustainable Investing Lead to Lower Returns?
Kyle Kroeger, esteemed Purdue University alum and accomplished finance professional, brings a decade of invaluable experience from diverse finance roles in both small and large firms. An astute investor himself, Kyle adeptly navigates the spheres of corporate and client-side finance, always guiding with a principal investor’s sharp acumen.
Hailing from a lineage of industrious Midwestern entrepreneurs and creatives, his business instincts are deeply ingrained. This background fuels his entrepreneurial spirit and underpins his commitment to responsible investment. As the Founder and Owner of The Impact Investor, Kyle fervently advocates for increased awareness of ethically invested funds, empowering individuals to make judicious investment decisions.
Striving to marry financial prudence with positive societal impact, Kyle imparts practical strategies for saving and investing, underlined by a robust ethos of conscientious capitalism. His ambition transcends personal gain, aiming instead to spark transformative global change through the power of responsible investment.
When not immersed in the world of finance, he’s continually captivated by the cultural richness of new cities, relishing the opportunity to learn from diverse societies. This passion for travel is eloquently documented on his site, ViaTravelers.com, where you can delve into his unique experiences via his author profile.