International Investing


If you want to balance some of the risks of investing in US stocks, you can diversify your portfolio by putting some of your money into equities available on overseas markets. The assumption is that an economic downturn at home could be offset by stronger performances abroad, since the markets would be responding to different economic conditions.

As electronic trading makes investing in overseas markets easier, though, it also emphasizes their interaction. That means that strengths or weaknesses in one market or region may carry over into others.

The currency risk – and its reward

To figure the stock price, divide the price per share by the exchange rate:

Price per share/Exchange rate = Stock price

To figure the gain or loss, divide the difference between the sale price and the initial cost by the initial cost:

(Sales price – initial cost) / Initial cost = Gain or loss

The greatest variable in calculating the risks and rewards of international investing hinges on changes in currency values. If the dollar shrinks in value, US investors make more when they sell at a profit. But just the opposite happens if the dollar gets stronger.

In this example, a US investor buys a German stock for 50 euros per share when the dollar is stronger than the euro. A year later, the investor sells for 60 euros per share. Clearly that’s a profit, but how much?

Since the price has gone up 10 euros per share, from 50 to 60, there’s a gain of 20%. That’s also what a German investor would have made on the deal. But the revaluation of the currency also affects the return. If the dollar were worth less than a euro — say 75 or 80 cents per euro instead of more than a euro — a US investor would have a greater gain.

But if the dollar gained ground against the euro, the US investor would have half the gain of someone investing in euros.

There may be rewards

Buying stocks abroad may produce rich returns. In the best of all possible worlds, investors win three ways, in what investment pros call the triple whammy:

  • The stock rises in price, potentially providing capital gains
  • The investment pays dividends
  • The country’s currency rises against the dollar, so that when US investors sell they get more dollars

But there are also risks

Buying stocks abroad is no less risky than buying at home. Prices do fall and dividends get cut. Plus, there may be hidden traps that can catch unwary investors. Here are some of the common ones:

  • Tax treatments of gains or losses differ from one country to another
  • Accounting and trading rules may be different
  • Converting dividends into dollars may add extra expense to the transaction
  • Some international exchanges require less information about a company’s financial condition than US exchanges do, so investors need to be wary
  • Unexpected changes in overseas interest rates or currency values can cause major upheavals
  • Political instability in a country or region has the potential to undermine investment values

Another perspective

Overseas investors make money in US stocks when the dollar is strong against their currency and stock prices are climbing. If the dollar weakens, though, the value of their investment drops as well.

Ways to invest

There are several ways for a US investor to buy international stocks:

  • Big US brokerage firms with branch offices abroad can buy stocks directly
  • Some international and multinational companies list their stocks directly on US exchanges
  • Many mutual funds and exchange traded funds (ETFs) offer international funds that invest overseas
  • The stock of some of the largest overseas companies is sold as American Depositary Receipts (ADRs) on US exchanges

Although trading information on ADRs, like GlaxoSmithKline or Toyota, is reported in US stock tables, the ADRs are certificates representing a set number of shares held in trust for investors by a bank. The bank converts the dividends it receives into dollars and takes care of withholding taxes, plus other paperwork. It’s the method of choice for many investors.

 

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