International share trading is a good way for you to diversify your investment portfolio. Overseas stock trading helps you look beyond the domestic market, by enabling you to acquire foreign stocks. One of the benefits that come with this form of investment is an increase in potential returns. The increase is often hedged against any woes that may be prevalent in the domestic markets.
Given that all countries have independent policies, and run their own economies, the addition of such stocks does not necessarily translate to an increase in your portfolio’s risk. This is because of the low correlations present between the overseas markets and the domestic markets.
How to Invest in International Stock Market in Australia
People interested in overseas share trading are normally people who have an interest in gaining from diversification, and any growth that may occur in other markets. This is a critical factor given that no market has been able to remain on top for long, and there’s a variance in the performance of global markets. Some of the popular ways to trade in International stocks from Australia include:
- ADR (American Depository Receipt)—they work well for international investors as they provide them with a convenient way to acquire foreign stocks. ADRs represent shares in different ratios, with each representing a given fraction of the foreign stock.
- Mutual Funds—ideal for an investor who wants to explore the international markets without encountering any hassles. It presents an investor with an opportunity to purchase international stocks and come with varying levels of aggressiveness, from conservative to aggressive. Some of the funds that invest in this type of foreign funds are international funds, international index funds, and global funds.
Opportunities in International Share Trading
The quickest way for you to get started trading in the foreign stock market is through the acquisition of ETFs (exchange-traded funds). The ETFs often hold baskets of international bonds, and stocks, and have holdings in multiple countries and industries.
This kind of fund will provide an investor with a foreign component that is quick, and highly diversified in just a single transaction. An investor can choose between different kinds of ETFs which include:
- Sector funds — they invest in particular sectors, e.g., gold
- International funds — they have broad investments in various countries across the globe
- Country funds — these are specific to certain countries, such as the United States, Russia, and Spain
- Regional funds — focus on particular regions like the Middle East, Asia, or Europe
Read more on opportunities in International share market.
Risk in International Share trading
Overseas stock trading can provide you with more, and better investment options than what has been listed in the ASX (Australian Securities Exchange), Chi-X Australia, and the National Stock Exchange of Australia. It will also provide you with a diversified investments portfolio that may include international shares, and which will cushion you against losses in case the local markets experience an unexpected downturn.
On the other hand, this type of investment is not devoid of risks. Some of its risks include:
- Exchange Rate Volatility — before you can make an investment, you first need to convert the Australian dollars into the currency that will be used in buying the shares. When converting back to Australian dollars, there is always a risk that you could find an unfavorable exchange rate, than when you initially made the conversion.
- Liquidity — capital losses or gains can only be realized when a sell order has already been settled. International share trading may at times be characterized by the presence of few participants, translating to reduced trade volumes. Therefore, if you are currently trading on small international stock exchanges, there is always a risk that you could lack buyers for your shares. You should, therefore, heed all risks when dealing with emerging markets in overseas trading.
Factors Controlling International Share Trading
Overseas stock trading is controlled by many diverse factors. Factors that are likely to influence the rise or fall of certain shares may range from company earnings to a change in investor confidence. They include:
- Company news and performance — company-specific factors that are likely to affect the prices of international stocks include:
- News release on profits, earnings, and estimated future earnings
- Employee Layoffs
- Dividend announcement
- Accounting scandals or errors
- Management changes
- Industry performance — normally, you will find that companies in the same sector will have their stocks moving in tandem. The reason for this is that market conditions tend to affect companies in the same industry in the same manner. However, there are times when a company’s stock prices could benefit from bad news involving their competitors.
- Investor sentiment — investor confidence or sentiment affects the way the market behaves, and this may cause the international stock prices to rise or fall. The direction taken by the stock market can affect a stock’s value:
- Bull market— a term used to describe a strong overseas market characterized by a rise in investor sentiment. Bull markets are often associated with an economic boom, economic recovery, and investor optimism.
- Bear market¬—this is described as a weak market marked by falling investor confidence and stock prices. It is very common when the rate of unemployment is high, and the economy is undergoing a recession. The prices of basic commodities tend to be very high during such periods.
- Economic Factors — they include economic outlook, interest rates, deflation, inflation, changes in economic policy, economic and political shocks, the current value of the Australian dollar.
Who Is Perfect for International Share Trading?
The goal of each investor is to earn as many profits as possible, without encountering huge losses, or taking unnecessary risks in the shares market. There are investors who have shied away from overseas share trading altogether due to the misconception that such shares are risky and volatile. Even though all stocks are volatile, it may not be as risky as many assume, provided that you make an effort to research your markets carefully. You are perfect to invest in international stocks if:
- You want to diversify your portfolio and geopolitical risks
- You want to get more investment choices
The bottom line is that ADRs and international funds are ideal ways for you to build exposure, and grow your portfolio without having to stress about international regulations. By observing the tips mentioned above, you can soon be on your way towards increasing and diversifying your portfolio.