What are international stocks?
International stocks are shares of companies that are based outside of your home country. These stocks can be traded on an international exchange or an exchange in your home country that offers foreign stocks. When you buy international stocks, you are investing in the growth and success of companies in other countries.
International stocks come in a variety of forms, including developed and emerging markets. Developed markets refer to countries with advanced economies and stock markets such as the United States, Canada, and Japan. Emerging markets, on the other hand, are countries with economies that are still developing, such as China, India, and Brazil.
Investing in international stocks can be intimidating for many investors, but it is important to remember that diversification is key to a successful portfolio. By investing in international stocks, you can reduce your overall portfolio risk and potentially increase your returns.
Benefits of investing in international stocks
Diversification
One of the biggest benefits of investing in international stocks is diversification. By investing in foreign stocks, you are spreading your investments across several countries and regions, reducing the impact of any one country’s economic and political risks on your portfolio.
Diversification can also help you to achieve better performance because it allows you to invest in industries and sectors that may not be present in your home country. For example, if you live in the United States and invest exclusively in domestic stocks, you may miss out on the growth potential in emerging markets.
By investing in a diversified portfolio of international stocks, you may be able to achieve higher returns and reduce your overall portfolio risk.
Exposure to global megatrends
Another benefit of investing in international stocks is that it allows you to gain exposure to global megatrends. Megatrends are long-term trends that are shaping the world, such as climate change, digitalization, and urbanization.
Many of these trends are playing out in countries outside of your home country. By investing in international stocks, you can gain exposure to companies that are at the forefront of these megatrends, potentially benefiting from their growth and success.
Currency diversification
Investing in international stocks can also provide currency diversification. When you invest in foreign stocks, you are also investing in the currency of the country where the company is based.
Over the long term, currencies can fluctuate significantly in value, which can impact the value of your investments. By investing in a diversified portfolio of international stocks, you can reduce your exposure to any one currency and potentially benefit from currency fluctuations.
Access to unique investment opportunities
By investing in international stocks, you can gain access to unique investment opportunities that may not be available in your home country. This includes the opportunity to invest in companies that are market leaders in their respective industries, as well as access to emerging companies that are poised for growth but are not yet publicly traded in your home country.
International stocks also provide exposure to industries and sectors that may not exist in your home country. For example, if you live in the United States and invest exclusively in domestic stocks, you may miss out on the growth potential in the Chinese tech sector.
Potential for higher returns
Finally, investing in international stocks can provide the potential for higher returns. Over the long term, international stocks have historically outperformed domestic stocks, driven by faster economic growth in emerging markets and exposure to global megatrends.
While investing in international stocks does come with more risk than investing exclusively in domestic stocks, the potential for higher returns can be worth the extra risk.
Risks of investing in international stocks
While there are many benefits to investing in international stocks, there are also some risks that investors should be aware of.
One of the biggest risks is currency risk. As we mentioned earlier, investing in international stocks means investing in the currency of the country where the company is based. Currencies can fluctuate significantly in value, which can impact the value of your investments.
Another risk is political risk. Investing in companies based in countries with unstable political environments can be risky, as political instability can impact a company’s performance and ultimately your investment returns.
Finally, there is the risk of market volatility. International stock markets can be more volatile than domestic markets, driven by economic and political factors that may be unique to each country or region.
How to invest in international stocks
Now that we’ve covered the benefits and risks of investing in international stocks, let’s talk about how to actually invest in them.
There are several ways to invest in international stocks, including:
- Directly buying foreign stocks on international exchanges
- Investing in international mutual funds or exchange-traded funds (ETFs)
- Investing in American Depository Receipts (ADRs), which are U.S. securities that represent shares in foreign companies
Each investment option has its own pros and cons, so it’s important to do your research and choose the option that best suits your investment goals and risk tolerance.
Conclusion
Investing in international stocks can be a great way to diversify your portfolio, gain exposure to global megatrends, and potentially achieve higher returns. However, it’s important to remember that investing in international stocks also comes with risks, including currency risk, political risk, and market volatility.
By doing your research, diversifying your investments, and working with a qualified financial advisor, you can make informed decisions about investing in international stocks and build a successful, diversified investment portfolio.
Thank you for reading! Happy investing!
