Five choices are available to U.S. investors who want to increase their international stock exposure:
- Stock of U.S. companies with large global footprints.
- American Depository Receipts.
- Foreign companies cross-listed on a U.S. exchange.
- International or global mutual funds.
- Foreign stock in your U.S. brokerage account.
U.S. multinational stocks: invest locally, diversify internationally
Many blue-chip domestic companies get most of their revenue outside the U.S. It’s usually easy to find that info in the financial reports; look for geographic segment data.
Two advantages to choosing U.S. multinationals are, first, their stocks are dollar-denominated – meaning they don’t require an international broker – and, second, securities regulation in the U.S. is more stringent than in many other countries.
American Depository Receipts: U.S. receipts for shares of foreign stocks
If you want to invest in a foreign company, look to see if there’s an American Depository Receipt (ADR) available for that company. ADRs are tradable interests in foreign shares. For example, one ADR of China-domiciled Alibaba stock represents eight ordinary shares of Alibaba. ADRs trade on exchanges and over the counter. ADRs aren’t stock; they are securities that represent ownership in other securities, namely, shares of foreign stock.
ADRs aren’t stock; they are securities that represent ownership in other securities, namely, shares of foreign stock.
You should evaluate an ADR on the strengths of the underlying company’s stock, the home country’s stock market, the attractiveness of the business sector, and the terms of the ADR itself. The United States regulates some ADRs differently from others. For example, a Level 1 ADR doesn’t require full SEC registration, unlike those that are Levels 2 and 3.
Buy cross-listed shares of a foreign company
Cross-listed stocks are simply shares of the same company listed on multiple exchanges. Companies cross-list to increase the liquidity of the shares and get access to new stock markets. The downside to cross-listing is more paperwork and higher costs.
Cross-listed shares can trade in different currencies. The U.S. listed shares are regulated by U.S. exchanges. Some examples of cross-listed stocks are Carnival Cruise Lines (United Kingdom) and Barrick Gold (Canada).
Leave it to professionals: international/global funds
Another option is to buy international funds managed by domestic fund managers. “Global” funds usually include U.S. stocks. “International” funds usually exclude or minimize investing in the U.S. They are also regulated in the United States and are denominated in greenbacks.
Professionally managed international funds tend to be costlier than domestic index funds because of the additional work and costs involved.
For the true do-it-yourselfer: buy foreign stock on a foreign exchange
The last investment option we’ll cover here is buying foreign stock where it’s listed. Investing directly in foreign stock is a bit more complicated than buying a mutual fund and letting a portfolio manager do all the work, but you’ll also have many more choices.
Unless you’re trading solely on chart action, there are additional considerations to buying foreign stock beyond what you’d ordinarily think about when analyzing a domestic stock.
Different markets have different valuations. What might be cheap in one country could be considered pricey in the United States. Taxation policies across borders will drive different business practices than what we’re accustomed to in the U.S. For example, stock buybacks are an efficient way for companies to distribute earnings to shareholders, but in another country, a company might serve its owners better by paying a dividend. Last but not least, regulation – both its scope and its enforcement – may be less reliable than here in the United States.
The local price of a foreign stock can go down but you may still make money if the dollar’s value declines against the stock’s native currency. The opposite can happen, too; the stock might go up in its home currency, but if that currency weakens, you could go in the red. If the foreign country floods its citizens with euros, yen, or whatever its citizens spend to buy toothpaste, that will push the value of the foreign currency in dollars lower.
euro Forex trading
Are you interested in trading foreign exchange instead of stock? Check out our sister site, ForexBrokers.com.
International investing comes with costs that might be new to you. Dollars may need to be exchanged for foreign currency when you buy and vice versa when you sell. Brokers can do that for you automatically, but they typically tack on a small (or sometimes not that small) spread that can drive up costs. If you routinely trade in a particular foreign market, you might want to leave the money in that foreign currency rather than converting after you close every position.
If you routinely trade in a particular foreign market, you might want to leave the money in that foreign currency rather than converting after you close every position.
To buy foreign stocks, you must first open a brokerage account with a broker that can trade in the country where you want to invest. Then, after funding your account, you may need to request access (including price data) for the exchange you want to trade.
Alternatively, simply search for the specific symbol to see if it is available to trade from within your account. A symbol that works for one broker may not work for another.
Example: A trader who wants to buy British Petroleum PLC (LSE: BP) would enter the symbol BP on the trading platform. If you enter this on the Interactive Brokers platform, BP will yield a few results, but the correct one if you want to buy it on the London Stock Exchange (LSE) is “BP PLC – LSE.”
Companies can have multiple results because one company may have several securities and/or symbols. A foreign stock may be dually listed or trade as an American Deposit Receipt (ADR). There may also be derivatives such as contracts for difference (CFD) or options. Bottom line: you should know the exchange and symbol to buy an international stock.