For many traders, investing in a foreign stock market is a challenging way to balance a portfolio; however, if done correctly, the results are rewarding. Investors that do get involved in investing in a foreign market get the opportunity to discover several emerging markets that give them faster growth opportunities in comparison to developed countries.
Kavan Choksi– getting started with foreign stock market investments
Leading business and finance expert Kavan Choksi recommends that in order to start investing in the foreign stock market safely, you first must have a solid understanding of the critical issues you are likely to face. Once you have a good knowledge of these risks in different markets, you can customize the manner in which you buy stocks from them for your growth.
Transparency
One of the primary issues that investors face in a foreign stock market is the lack or even the absence of transparency. There are several emerging and developing markets that have different levels of reporting standards than the USA. For instance, the Securities and Exchange Act of 1934 mandates that every company listed on the stock exchange of the USA needs to report their quarterly earnings and file the correct documentation regularly with the Securities and Exchange Commission.
The above can include 10Qs, 10Ks, or other document types. In some nations, the above rules are not applicable, so it can be challenging for an investor to get accurate data about the company. Moreover, accessing this information, even if available, might surface with a language barrier.
Risks of currency
When the nation’s currency in which an investment is made appreciates compared to the USA, the value of that investment becomes higher. Likewise, when it depreciates against the USD, its value will fall and can become worthless. There are some nations that impose restrictions on countries that could stop or even delay the cash-out of the currency of the nation.
Buying stocks in foreign markets
Buying stocks in a foreign market is challenging, as brokers need access to some calls to perform specific trades. When brokers can make this trade, the time for reporting and clearing might take longer time than the markets in the USA, making the settlements take longer. Again, the safekeeping of these shares might not be safeguarded against thefts or fraud if the brokerage firm or the bank fails.
Business and financial management expert Kavan Choksi states that the foreign stock markets are often volatile and susceptible to frequent swings, both up and down. These swings can be extreme when compared to the stock markets in the USA because of insider trading, manipulation, and other factors. For instance, this situation took place in 1994 in Mexico.
Between the years 1989 to 1993, Mexico could control inflation and reduce its increasing foreign debt. Before 1994, the peso had been pegged to the US dollar at a fixed rate. When the Mexican government decided to increase the trading band from 3.47 to 4, a big collapse, massive in size, occurred in the peso causing stocks in the Mexican Stock Exchange to decline to the extent of 60%.
