International Investing
There are different ways you can invest internationally:
through mutual funds, American Depositary Receipts, exchange-traded funds, U.S.-traded
foreign stocks, or direct investments in foreign markets. This online brochure explains
the basic facts about international investing and how you can learn more about
foreign companies and markets. Although this brochure covers foreign stocks,
much of it also applies to foreign bonds.
Why should investors read this brochure?
As investors have learned recently, the market value of
investments can change suddenly. This is true in the U. S. securities markets,
but the changes may be even more dramatic in markets outside the United States. The world’s economies are becoming more interrelated, and dramatic changes
in stock value in one market can spread quickly to other markets.
Keep in mind that even if you only invest in stocks of U.S. companies you already may have some international exposure in your investment
portfolio. Many of the factors that affect foreign companies also affect the
foreign business operations of U.S. companies. The fear that economic problems
around the globe will hurt the operations of U.S. companies can cause dramatic
changes in U.S. stock prices.
Sudden changes in market value are only one important
consideration in international investing. Changes in foreign currency exchange
rates will affect all international investments, and there are other special
risks you should consider before deciding whether to invest. The degree of risk
may vary, depending on the type of investment and the market. For example,
international mutual funds may be less risky than direct investments in foreign
markets, and investing in developed economies may avoid some of the risks of investing
in emerging markets.
Why do many Americans invest in foreign markets?
Two of the chief reasons why people invest internationally
are:
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Diversification -- spreading your investment risk
among foreign companies and markets that are different than the U.S. economy, and |
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Growth -- taking advantage of the potential for
growth in some foreign economies, particularly in emerging markets. |
By including exposure to both domestic and foreign stocks in
your portfolio, you'll reduce the risk that you'll lose money and your
portfolio's overall investment returns will have a smoother ride. That’s
because international investment returns sometimes move in a different
direction than U.S. market returns. Even when international and U.S. investments move in the same direction the degree of change may be very different.
When you compare the returns from emerging international markets with U.S. market returns you may see even wider swings in value.
Of course, you have to balance these considerations against
the possibility of higher costs, sudden changes in value, and the special risks
of international investing.
What are the special risks in international investing?
Although you take risks when you invest in any stock,
international investing has some special risks:
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Changes in currency exchange rates. When the exchange
rate between the foreign currency of an international investment and the
U.S. dollar changes, it can increase or reduce your investment return. How
does this work? Foreign companies trade and pay dividends in the currency
of their local market. When you receive dividends or sell your international
investment, you will need to convert the cash you receive into U.S.
dollars. During a period when the foreign currency is strong compared to
the U.S. dollar, this strength increases your investment return because
your foreign earnings translate into more dollars. If the foreign currency
weakens compared to the U.S. dollar, this weakness reduces your investment
return because your earnings translate into fewer dollars. In addition to
exchange rates, you should be aware that some countries may impose foreign
currency controls that restrict or delay you from moving currency out of a
country. |
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Investor Tidbit: What
is an index? An index is a group of stocks representing a particular
segment of a market, or in some cases the entire market. For example, the
Standard & Poor's 500 index represents a specific segment of the U.S. capital markets. Foreign stock markets also may be represented by an index, such as
the MSCI EAFE index, a well-known index in more developed foreign markets, the Nikkei
index of large Japanese companies, or the CAC 40 index of large French
companies. The components of an index can change over time, as new stocks are
added and old ones are dropped. |
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Dramatic changes in market value. Foreign markets,
like all markets, can experience dramatic changes in market value. One
way to reduce the impact of these price changes is to invest for the long
term and try to ride out sharp upswings and downturns in the market. Individual
investors frequently lose money when they try to "time" the
market in the United States and are even less likely to succeed in a
foreign market. When you “time” the market you have to make two astute
decisions -- deciding when to get out before prices fall and when to get
back in before prices rise again. |
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Political, economic and social events. It is
difficult for investors to understand all the political, economic, and
social factors that influence foreign markets. These factors provide
diversification, but they also contribute to the risk of international
investing. |
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Lack of liquidity. Foreign markets may have lower
trading volumes and fewer listed companies. They may only be open a few
hours a day. Some countries restrict the amount or type of stocks that foreign
investors may purchase. You may have to pay premium prices to buy a
foreign security and have difficulty finding a buyer when you want to sell. |
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Less information. Many foreign companies do not provide
investors with the same type of information as U.S. public companies. It
may be difficult to locate up-to-date information, and the information the
company publishes my not be in English. |
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Reliance on foreign legal remedies. If you have a
problem with your investment, you may not be able to sue the company in
the United States. Even if you sue successfully in a U.S. court, you may not be able to collect on a U.S. judgment against a foreign company. You may have
to rely on whatever legal remedies are available in the company's home
country. |
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Different market operations. Foreign markets often
operate differently from the major U.S. trading markets. For example,
there may be different periods for clearance and settlement of securities
transactions. Some foreign markets may not report stock trades as quickly
as U.S. markets. Rules providing for the safekeeping of shares held by
custodian banks or depositories may not be as well developed in some
foreign markets, with the risk that your shares may not be protected if
the custodian has credit problems or fails. |
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What are the costs of international investments?
International investing can be more expensive than investing
in U.S. companies. In smaller markets, you may have to pay a premium to
purchase shares of popular companies. In some countries there may be unexpected
taxes, such as withholding taxes on dividends. Transaction costs such as fees,
broker’s commissions, and taxes often are higher than in U.S. markets. Mutual funds that invest abroad often have higher fees and expenses than
funds that invest in U.S. stocks, in part because of the extra expense of
trading in foreign markets.
What are the different ways to invest
internationally?
Mutual funds. One way to invest internationally is through
mutual funds. There are different kinds of funds that invest in foreign stocks.
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Global funds invest primarily in foreign companies,
but may also invest in U.S. companies. |
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International funds generally limit their investments
to companies outside the United States. |
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Regional or country funds invest principally in
companies located in a particular geographical region (such as Europe or Latin America) or in a single country. Some funds invest only in emerging markets, while
others concentrate on more developed markets. |
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International index funds try to track the results
of a particular foreign market index. Index funds differ from actively
managed funds, whose managers pick stocks based on research about the companies. |
International investing through mutual funds can reduce some
of the risks mentioned earlier. Mutual funds provide more diversification than
most investors could achieve on their own. The fund manager also should be familiar with international
investing and have the resources to research foreign companies. The fund will
handle currency conversions and pay any foreign taxes, and is likely to
understand the different operations of foreign markets.
Like other international investments, mutual funds that
invest internationally probably will have higher costs than funds that invest
only in U.S. stocks. If you want to learn more about investing in mutual
funds, information is available in our brochure, Invest Wisely – An
Introduction to Mutual Funds.
Exchange-Traded Funds. An exchange-traded fund is a type of
investment company whose investment objective is to achieve the same return as
a particular market index. Increasingly popular with investors, ETFs are
listed on stock exchanges and, like stocks (and in contrast to mutual funds),
trade throughout the trading day. A share in an ETF that tracks an
international index gives an exposure to the performance of the underlying stock
or bond portfolio along with the ability to trade that share like any other
security.
American Depositary Receipts. The stocks of most
foreign companies that trade in the U.S. markets are traded as American Depositary
Receipts (ADRs) issued by U.S. depositary banks.
Investor Tidbit: ADRs
or ADSs? Sometimes the terms “ADR” and “ADS” (American Depositary
Share) are used interchangeably. An ADR is actually the negotiable physical
certificate that evidences ADSs (in much the same way a stock certificate
evidences shares of stock), and an ADS is the security that represents an
ownership interest in deposited securities (in much the same way a share of
stock represents an ownership interest in the corporation). ADRs are the
instruments actually traded in the market. |
Each ADR represents one or more shares of a foreign stock or
a fraction of a share. If you own an ADR you have the right to obtain the
foreign stock it represents, but U.S. investors usually find it more convenient
to own the ADR. The price of an ADR corresponds to the price of the foreign
stock in its home market, adjusted for the ratio of ADRs to foreign company
shares.
Owning ADRs has some advantages compared to owning
foreign shares directly:
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When you buy and sell ADRs you are trading in the U.S. market. Your trade
will clear and settle in U.S. dollars. |
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The depositary bank will convert any dividends or other
cash payments into U.S. dollars before sending them to you. |
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The depositary bank may arrange to vote your shares for
you as you instruct. |
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On the other hand, there are some disadvantages:
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It may take a long time for you to receive information from
the company because it must pass through an extra pair of hands. You may
receive information about shareholder meetings only a few days before the
meeting, well past the time when you could vote your shares. |
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Depositary banks charge fees for their services and will deduct
these fees from the dividends and other distributions on your shares. The
depositary bank also will incur expenses, such as for converting foreign currency
into U.S. dollars, and usually will pass those expenses on to you. |
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U.S. Traded Foreign Stocks
Although most foreign stocks trade in the U.S. markets as ADRs, some foreign stocks trade here in the same form as in their local
market. For example, Canadian stocks trade in the same form in the United States as they do in the Canadian markets, rather than as ADRs. You can purchase ADRs and
other foreign stocks that trade in the United States through your broker. There
are different trading markets in the United States, and the information available
about an ADR or foreign stock will depend on where it trades.
Stocks Trading on Foreign Markets
If you want to buy or sell stock in a company that only
trades on a foreign stock market, your broker may be able to process your order
for you. These foreign companies do not file reports with the SEC, however, so
you will need to do additional research to get the information you need to make
an investment decision. Always make sure any broker you deal with is registered with the SEC. It is against
the law for unregistered foreign brokers to call you and solicit your
investment.
What should I do if I want to invest?
Like any other investment, you should learn as much as you
can about a company before you invest. Try to learn about the political, economic,
and social conditions in the company’s home country, so you will understand
better the factors that affect the company’s financial results and stock price.
If you invest internationally through mutual funds, make sure you know the
countries where the fund invests and understand the kinds of investments it
makes.
Here are some sources of information:
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SEC reports. Many foreign companies file reports
with the SEC. The SEC requires foreign companies to file electronically,
so their reports usually are available through the SEC’s web site at www.sec.gov/edgar.shtml at no
charge. You can get paper copies for a fee from the SEC’s Public
Reference Branch by calling (202) 551-8090 or sending a request to:
Public Reference Branch
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549
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International Regulators. You might be able to
learn more about a particular company by contacting the securities
regulator that oversees the markets in which that company’s securities
trade. Many international securities regulators post issuer information
on their websites, including audited financial statements. You’ll find a
list of international securities regulators on the website of the
International Organization of Securities Commissions (IOSCO) at www.iosco.org. |
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Mutual fund firms. You can get the prospectus for
a particular mutual fund directly from the mutual fund firm. Many firms
also have websites that provide helpful information about international
investing. |
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The company. Foreign companies often prepare
annual reports, and some companies also publish an English language
version of their annual report. Ask your broker for copies of the
company’s reports or check to see if they are available from the SEC. Some
foreign companies post their annual reports and other financial information
on their websites. |
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Broker-dealers. Your broker may have research
reports on particular foreign companies, individual countries, or geographic
regions. Ask whether updated reports are available on a regular basis.
Your broker also may be able to get copies of SEC reports and other
information for you. |
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Publications. Many financial publications and
international business newspapers provide extensive news coverage of
foreign companies and markets. |
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Internet Resources. Various government,
commercial, and media websites offer information about foreign companies
and markets. However, as with any investment opportunity, you should
be extremely wary of “hot tips,” overblown statements, and information
posted on the Internet from unfamiliar sources. For tips on how to
spot and avoid Internet fraud, please visit the “Investor Information”
section of our website at www.sec.gov/investor.shtml. |
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Investor Tidbit: International Stock Scams
Whether it’s foreign
currency trading, “prime European bank” securities or fictitious coconut plantations
in Costa Rica, you should be skeptical about exotic-sounding international investment
“opportunities” offering returns that sound too good to be true. They usually are.
In the past, con artists have used the names of well-known European banks or
the International Chamber of Commerce -- without their knowledge or permission
-- to convince unsophisticated investors to part with their money.
Some promoters based in the United States try to make their investment schemes sound more enticing by giving them an
international flavor. Other promoters actually operate from outside the United States and use the Internet to reach potential investors around the globe. Remember
that when you invest abroad and something goes wrong, it's more difficult to
find out what happened and locate your money. As with any investment
opportunity that promises quick profits or a high rate of return, you should
stop, ask questions, and investigate before you invest. |
Tracking down information on
international investments requires some extra effort, but it will make you a
more informed investor. One of the most important things to remember is to read
and understand the information before you invest.
If you have more questions or if
you have a problem with your international investment, please contact us right
away. To submit your complaint electronically, please visit our online Complaint Center at www.sec.gov/complaint.shtml.
You also may send us a letter at the following address:
Office of Investor Education and Advocacy
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549-0213
http://www.sec.gov/investor/pubs/ininvest.htm