Thinking about making a good investment is a complex undertaking. Now imagine the complexity that arises when you aren’t dealing with a domestic market, but one overseas. With international investing, you not only have the same complexities as with a domestic investment, but you also have to deal with language barriers, time zones, currency conversions, foreign exchange regulations, and the tax regulations of two different countries.
Yet despite this daunting challenge, if you want to be a first-rate investor, it’s advisable to trade and invest in foreign markets. Besides diversifying your portfolio, the foreign market may offer a unique opportunity not available anywhere else. Right now, the Iraqi dinar is weak, which means that it’s easy to buy. But if it is revalued, after Iraq rebuilds itself after the devastation of the war and once again become a major oil producer, then it would be a game changer. If you’re holding on to any Iraqi dinars, you could be handsomely cashing in on your profits!
Fortunately, there are at least 3 ways of trading in foreign markets, where the technical barriers to entry like language, rates, rules, and regulations are managed by a third-party so that you can focus on the complexities of the transaction alone.
1. The Forex Market
The most well-known way to work in foreign markets is the forex trading market. Trades are based on the rate that one currency can be easily exchanged with another currency. Consequently, an exchange rate is correlated in pairs. So, for example, you might get a quote for AUD/USD, which will compare the Australian dollar with the US Dollar. Should the exchange rate rise, you can sell the Australian dollars you bought earlier and make a profit. However, this is a simple example. You can also work with the AUD/USD and Gold. This is a complex transaction where you must correlate three factors, the Australian Dollar, the US Dollar, and the gold market.
2. Stocks and Bonds
Besides working with currency, you can also trade with stocks and bonds The easiest way to do this in a foreign market is by buying exchange-traded funds (ETFs) or buying a mutual fund that has a basket of international stocks and foreign bonds. In this way, using these two fund types, you can invest in multiple countries and a wide swath of industries. Moreover, you can acquire this quick, extreme diversification in a single transaction. For example: International Funds will allow you to invest in many countries; Regional Funds will allow you to invest in specific regions, for instance, Europe; Country Funds will allow you to invest in a specific country, for instance, France; and Sector Funds will allow you to invest in particular sectors across many different countries, for instance, energy.
3. Individual stocks.
While using established funds is the easiest way to invest in foreign markets in a number of ways, what if you prefer to buy individual stocks? Well, you can through American Depository Receipts (ADRs). ADRs were introduced in 1927 specifically to make it simple for an American investor to buy stock in a foreign company. This worked out well for everybody. American investors managed to diversify their portfolio while foreign companies were able to attract investors from the USA. ADRs are listed on the NYSE, on AMEX, and on Nasdaq. They are also sold over-the-counter by brokerages.
According to Investopedia, “An American depositary receipt (ADR) is a negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas, and holders of ADRs realize any dividends and capital gains in U.S. dollars, but dividend payments in euros are converted to U.S. dollars, net of conversion expenses and foreign taxes.”
A Chess Analogy
Every investment is as complex as a game of chess. In chess, you don’t simply move a piece based on the rules of the game. You only make a move after reviewing a series of new variations that will emerge on the board as a consequence of your move. Similarly, when you invest, you don’t simply buy low and sell high in a financial market; you run through a long series of calculations.
Another way this analogy holds is in terms of internationalism. American Bobby Fisher was able to play against Russian Boris Spassky for the world chess championship despite the Cold War because they both understood the game of chess and the games were organized by an international chess organization. Similarly, when you invest, you use an international organization or platform to facilitate the transaction.