Investors are finders of profit. They always invest wisely, and return on investment is their primary objective. Nowadays, many investors consider investing in international stocks to diversify their portfolios, reduce risk and increase returns. An international or foreign stock refers to the stock of any country which isn’t registered within the stock market of the investor’s home country. Investing in international stocks might be very beneficial for the investors; however, it has its benefits and risks. So during this blog, you’ll get to understand several advantages and risks you ought to consider before investing in international stocks. So allow us to now begin. 

Advantages of Investing in International Stocks 

An investor gets various advantages when he invests in stocks of foreign companies. a number of them are as follows:

#1Diversification of portfolios

Diversification of portfolios is one of the key advantages of investing in foreign markets. Diversification helps you scale back risk as once you invest in several countries of the planet, the volatility of 1 market doesn’t affect the opposite. The worldwide stock markets work unpredictably. Hence we will say that one factor useful for the Japanese stock market could also be dangerous for the NY stock market. So giving international exposure to your portfolio is important to scale back risk. For instance, an intelligent investor may split his portfolio evenly between domestic and foreign holdings. He may lose 25% in his domestic stocks and gain 32% in his foreign stocks, providing him a net return of seven. An intelligent investor generally invests evenly in developed and developing countries to scale back risk.

#2 Return on Foreign Currency

If you’re investing within the stock of a far-off country, you’re also investing within that country’s currency. Many investors wisely invest within the country, which appreciates from time to time, so that they also get the advantage of foreign currency within the future. For instance, if an investor from a developing country, say India, invests during a stock of a far-off country, say the U.S.A, regardless of what proportion he gains from the stock, he will certainly gain from the U.S. Dollar end of the day. As within the end of the day, the U.S. Dollar gives a 3-5 you return to Indian investors.

#3 Takes benefit of Business Cycles

An investor with a world portfolio can cash in the trade cycle (or market cycle) of various countries, which he can never take if he just invests in a single country. The market cycle or trade cycle refers to different cycles or stages of the economy: Recession, Boom, Recession, Recovery. An intelligent investor can easily make higher returns by taking advantage of various business cycles in several countries; for instance, Suppose a French citizen invest within the US, and just in case France goes to face a recession, then that French citizen can easily pull out all his money from the French market and invest it within the U.S. market. When France enters the recovery phase, he can reinvest all his money from the U.S. market to the French Market to earn higher returns.

#4 Tons of Investment options

Another advantage of investing in foreign may be a wide selection of investment options. An investor can choose from a developed market or a developing market. He may choose from a market or a market. He may choose from different sectors and, at last, tons of doors open up for an investor having a world portfolio.

Many of you begin thinking that investing in international stocks is the best investment of your life but wait, it also features many risks and drawbacks that you ought to consider before making your investment decision. Believe me it can highly impact your net worth.

Risk of Investing in Foreign Stock

Despite all the advantages of investing in foreign stock, there are many risks or disadvantages which an investor has got to face. Some risks and drawbacks which an investor has got to face by investing in foreign stocks are as follows:

#1 Investor has got to bear Higher transaction costs

A major disadvantage faced by international investors is higher transaction costs. Investors need to bear tons of charges like brokerage commission, foreign transaction charge, currency conversion charge, and lots of more charges. Also, international investors need to affect many taxes counting on the country during which he invests. He has got to pay any taxes, which eventually reduces his total earning from investing.

#2 Political and Economic Instability in Developing countries

In today’s world, many developing countries aren’t as stable as the US, both politically and economically. An investor may lose all his money if he fails to calculate the political and economic risk. for instance 

1) At this time, the Taliban is invading Afghanistan, numerous investors who invested in Afghanistan lose all of their money.

2) In Feb 2021, Myanmar saw a military coup, tons of”>numerous investors who invested in Myanmar lost a lot of cash.

3) Lebanon is facing depression. Their economy is close to collapse. So an investor who invested in Lebanon loses tons of cash.

That’s why the calculation of political and economic risk is critical before investing in another country.

#3 Fluctuation of foreign currency

This point is both a plus and an obstacle to investing in international stock. It totally depends on you on which country you would like to take a position in. Many investors want to take a position in a developing country to earn higher returns. But in most cases, the worth of a developing country’s currency depreciates within the future against the currency of a developing country. Also, an investor has to pay any charges associated with currency conversion, which eventually reduces his net return on investment. You’ll reduce this cost to some extent by investing through an ETF and mutual funds, but if you would like to shop for private stock, you’ve got in touch tons of charges.

#4 Upper-Cap on investment amount

Generally, many countries choose an upper-cap for foreign investors, above which any foreign investor cannot invest. For instance, within the US, the upper cap of investing amount is about $250,000 for Indian investors. This upper cap is different for various countries, counting on which country you reside in. So, if you would like to take a position with tons of cash in foreign stocks, you can’t transcend a limit, which may be a considerable disadvantage for several investors.

There are many risks and drawbacks which an investor has got to face if they plan to take a position in foreign markets aside from currency fluctuation, upper cap, instability, and better transaction costs. I personally recommend you require advice from a financial advisor if you’re getting to invest in international stocks.

Summary

There are many advantages and risks of investing in international stocks. Advantages of investing in foreign stock are:

#1 Diversification of Portfolio

#2 Return on Foreign Currency

#3 tons of Investment options

#4 Benefits from Business Cycles

Some disadvantages (risk involved) of investing in international stocks are:

#1 Investor has got to bear Higher transaction costs

#2 Political and Economic Instability in Developing countries

#3 Fluctuation of foreign currency

#4 Upper-Cap on investment amount

Conclusion

There are many advantages and drawbacks of investing in international stocks. Hence it totally depends on the investor how he invests his money. I recommend you require the assistance of a financial advisor because he can guide you more properly.

Frequently Asked Questions