What Are The Risks And Benefits Of Investing In Foreign Stocks? – International investment is essential to our portfolios as we participate in the global growth story. Adding international stocks to a portfolio can offer diversification and yield higher returns. However, there are benefits and risks associated with global investing. In this article we will discuss some important points.
Diversification is the most obvious but most critical benefit of global investing. A diversified portfolio acts as a source of stability during market volatility. When you spread your investments across geographies, they are less correlated. This means that volatility in one market is unlikely to affect your other assets.
What Are The Risks And Benefits Of Investing In Foreign Stocks?
Many US companies have global revenues. More than 40 percent of S&P 500 companies’ revenue comes from outside the US. By investing in the United States, you can build a globally diversified portfolio.
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Global investing allows you to access investment opportunities that are not available in the country. Developed markets like the US are home to some of the world’s biggest tech companies, which you can’t access by investing in India.
You can choose one subject or a combination of different areas. For example, you might choose the US market for technology, Europe for engineering, and Australia for commodities. If you are interested in health or pharmaceuticals, there are many options in the US and Europe.
You can access multiple geographies through ETFs. For example, you can invest in German stocks through the US-listed EWG ETF or the Brazilian market through the EWZ ETF.
Another important benefit of global investment is the protection of investors from fraud and liquidation. Developed brand companies generally have strong regulations that ensure good corporate governance and strong penalties for brand abuse. It protects retail investors from fraud and loss of inside information.
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Remember, capital is always at risk, but many foreign financial institutions offer protection against seizures and other threats such as broker liquidation. For example, in the US, SIPC protects investments up to $500,000 if your broker faces liquidation.
Investing abroad exposes you to currency appreciation (or depreciation). For example, the USD has appreciated by an average of 3 to 5 percent against the INR in recent years. Emerging market currencies tend to depreciate in the long term. Home Savings Accounts have an average interest rate of 3-4 percent lower.
The benefits of international investment are obvious. However, the risks involved must also be taken into account. There are three risks you should be aware of when investing globally.
The biggest barrier to investing in global markets is the additional transaction costs, which vary depending on the foreign market you want to invest in. For US markets, it offers zero commission brokerage, which is cheaper than domestic investment. For many other markets, entry may not be so cheap.
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In addition to brokerage fees, there may be additional costs that you need to consider, such as currency conversion fees, transfer fees, and annual maintenance fees.
If you invest directly in foreign markets, you must first convert your Indian rupees into a foreign currency at the current exchange rate. You hold a foreign stock for a year and sell it. Then you convert the foreign currency into Indian Rupees. Depending on how the national currency moves it can help or hurt your income.
While investing, you should also consider the geopolitical environment of the country. Political events can affect the country’s domestic market and lead to volatility. In developing markets, government and political decisions can harm even the most prominent companies. We have seen this many times in countries like Brazil and Argentina.
International investment has become the need of the hour to achieve robust portfolio diversification. While the benefits are lucrative, you should also be aware of the risks. There is a lot of information available online to help you assess your risks and ensure the right combination of your portfolio. You can also consult your financial advisor before taking any investment decision.
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Prateek is the co-founder and chairman of Prior to that, Prateek worked at Deutsche Bank for 11 years, where he led the global energy trading portfolio.
During these difficult times of lockdown and quarantine, everything around us, including our wallet, is literally standing still. No wonder the Indian markets are currently witnessing huge volatility due to the Covid-19 pandemic. Many of us now wish we had diversified our portfolio or are currently looking for efficient ways to diversify it.
Diversification is an investment strategy that recommends holding different investments that perform well at different times to reduce the effects of market fluctuations. Simply put, don’t put all your eggs in one basket. But how to choose different hats?
Rukesh Reddy, Chief Digital Transformation Officer at Citibank in New York, talks about why every investor should rely heavily on software companies when building an investment portfolio. Investing in startups is a great way to earn high returns. But it is also a high-risk investment. Before investing, it is important to understand the potential benefits and risks.
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1. High yield. Startups have the potential to generate high returns for investors. This is because they often have high growth potential and can be sold at a large profit.
2. Diversification. Investing in startups can help diversify your portfolio. This is because startups have less exposure to the stock market than larger companies.
3. Access to new products and services. Startups often give investors access to new products and services. This is a great way to get in on the ground floor of a new business.
4. Be a part of something new and exciting. Startups offer investors an opportunity to be part of something new and exciting. It’s a great way to get involved in an industry you’re passionate about.
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5. Support the economy. Investing in startups can help the economy. This is because startups often create new jobs and help with innovation.
1. High failure rate. Startups have a high failure rate. This means that there is a good chance that your investment will not be repaid.
2. Lack of liquidity. Startups are often not publicly traded, which means they are difficult to sell. This can make it difficult to get your money back when you need it.
3. Risk of Fraud. Startups are often companies without a high profile. This makes them more vulnerable to fraud.
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4. Slowdown of the economy. Startups are often more sensitive to downturns in the economy than larger companies. This means that your performance may be affected during a financial crisis.
5. Volatile stock prices. Startups often have volatile stock prices. This means their stock prices can rise and fall quickly, which is risky for investors.
When investing in startups, there are risks and rewards to consider. On the one hand, the initial stage
Businesses are often unproven and may not have the track record or tools to succeed. Also, startup investments are often very illiquid, meaning you may not be able to cash out your stake for years.
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However, the potential rewards for investing in a successful startup can be substantial. Startups often offer high growth potential and an opportunity to get in on the ground floor of a potentially game-changing business. For these reasons, investing in startups is a risky but profitable proposition.
When evaluating an initial investment, it is important to carefully weigh the risks and rewards. Here are some key risks to consider:
The most obvious risk of investing in startups is this: many of them fail. In fact, according to Shikhar Ghosh, a senior professor at Harvard Business School, three-quarters of venture-backed startups do not return capital from investors.
A startup may have a great idea, but if it cannot raise additional funding from venture capitalists or other investors, it may not be able to continue operating. The same was the case with Color, a photo-sharing app that raised $41 million in its first round of funding, but then struggled to raise more money and eventually shut down.
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Many startups focus on growth rather than profits, which is a risky strategy. If a startup doesn’t reach profitability, it runs out of money and is forced to shut down. The same was the case with e-commerce site Fab, which raised more than $300 million but later struggled to turn a profit and was sold for a fraction of its valuation.
Some startups are valued at billions of dollars, yet generate little to no revenue. This can make it difficult for investors to cash in on their investment unless the company is sold or has a higher valuation. For example, many investors who put money into Snapchat in the early days are still waiting for a return because the company has yet to go public or be sold.
Startup investments are often very illiquid, meaning you may not be able to sell your stake for years. This can be a problem if you have access to yours