If you like the idea of spreading your assets so that you’ll take less of a hit in the event of an economic downturn, or if you just want to explore new areas and add something a little different to your portfolio, trading foreign stock could be for you. It’s a complicated area however, with lots of regulations to learn and paperwork to deal with. What are the most important things you need to know in order to make a success of it?
Direct investing
There are two main ways you can invest in foreign stocks. The first is by buying stocks of companies that are based in other countries through Australian exchanges. The second, which carries more risk but offers greater profit potential is buying stock directly through foreign exchanges – shares referred to as foreign ordinaries. What’s most important when doing this is to ensure that you’re able to apply the same level of scrutiny that you would when buying domestic shares. Don’t be tempted by strangers who approach you with supposedly great deals – instead, find a reliable online broker with a specialty in this area and do your research before closing deals.
Managing money
One of the advantages of domestically traded foreign shares is that you can buy them in dollars. When you’re buying foreign stocks directly, you’ll need a supply of the appropriate currency. You can arrange this at the point of trade, but this leaves you at the mercy of the exchange rates – something that can be offset by hedging with forex but only between the points of making and closing the deal. If you’re buying stocks in one particular currency frequently, it makes more sense to open a nostro account and add funds to it whenever the exchange rate is favourable so that it will be ready ahead of the decision to purchase.
Other ways to trade
If direct investing and domestically traded foreign shares don’t appeal, there are other ways to get involved in foreign market trading. International mutual funds and CFDs (contracts for difference) based on foreign stock indices give you – at least in theory – access to expert picks, but you can expect to pay more for the privilege. International index exchange-traded funds (ETFs), meanwhile, offer the opportunity to buy stocks from a number of different countries using a single currency and can be a good way of getting access to emerging markets, with all the risk and opportunity that entails. Try out a Robinhood alternative to trade socks. VectorVest can help you out with great tips and information like position trading and swing trading differences.
However you choose to do it, trading in foreign stocks tends to be more expensive than sticking to domestic ones, but if you’re smart about your approach it can really pay back. It’s a great way to expand your network and tap into fresh resources while expanding your market knowledge in ways that may improve your decision making on local purchases as well. It provides you with insurance against domestic market problems into the bargain. As long as you exercise due caution you can make it a success.
