The Australian stock market is just about 1.7% of the global piece. In fact, the size of the country’s market has shrunk from 3.5% in 1899 to what it is today. According to Country Economy’s data, the Australia Stock Exchange (ASX) ranks number 16 in the world.
Which means that if you are really serious about ensuring that you have the best investments in your portfolio, then you need to at least consider investing in foreign shares.
Thus, if you are looking for opportunities in international share trading, then here is a quick guide that gives you tips on what to look for.
Risk of Concentration
The Australian market is particularly concentrated, with just a few big organizations controlling a majority of the market capitalization. The four big banks, BHP Billiton, Rio Tinto, Telstra, Wesfarmers, CSL Limited and Woolworths control about 50% of the stock market in Australia. The financial and mining industries control around 60% of the ASX All-Ordinaries Index.
A simple graph can show you the lopsidedness of the market at this time.
What this means for you is that if you invest only in domestic stocks, your portfolio is not going to be too diversified. By expanding your options to include opportunities in international share trading, you can acquire a much broader range of class-leading businesses or sectors.
Ways to Access International Markets
Australians can trade in international shares in the following ways:
Brokers or Online Brokerages
You can use the services of brokerage firms or online broking services to trade in international shares. Such firms usually have the ability to trade in shares listed on major stock exchanges around the world, especially the New York Stock Exchange, the NASDAQ, the London Stock Exchange and the Euronext.
If you are looking at specific companies or markets, then you need to check with your broker if they trade there.
Direct international share trading is much more expensive that trading domestically. Ensure that you check what your fees are like. Typically, you would need to pay brokerage fees, plus currency conversion fees, internal transfer fees as well as foreign security custody charges.
The four big banks of Australia – Westpac, Commonwealth Bank of Australia, NAB and ANZ – all offer international trading accounts. However, you also have the option of trading through other major non-banking stock brokers such as Bell Potter, CMC Markets, Morgans and Patersons.
You money is pooled with money from other investors and managed by an investment manager on your behalf. Fund managers will usually have strategies in place to control the impact of exchange rate changes on your investments.
Investment managers create various funds to maximize earnings for their investors. Therefore, some funds will be targeted at international shares. Within that, they may focus on specific industries or regions. However, other funds may simply include international shares as a part of the investment portfolio.
A word of caution – please read the product disclosure statements (PDS) carefully and make sure you choose only those investments that are aligned to your personal investment goals as well as risk tolerance.
Exchange Traded Funds
Exchange Traded Funds, also called ETFs, are investment funds that have been listed on a stock exchange which track the movement of a specific index or sector of the market. ETFs can be traded in just like ordinary shares through a brokerage on an online trading account.
ETFs are good way to learn about international share trading without investing too much money. However, again, please read through the PDS to know exactly what you are getting into and what your risks are.
Benefits and Risks of Trading in International Shares
Besides the usual risks that all forms of trading carry, here is a list of risks that are unique to international trading:
Foreign shares are always held in the currency of origin. This means that if you have invested in American shares, your income as well as capital gains or losses will be in US dollars. Therefore, your money is also subject to the volatility of exchange rates. So, if the AUD gains, your investments lose value. Conversely, if the AUD loses, then your investments gain value.
Regulatory and Political Risk
Foreign shares are also dependent on that country’s political situation as well as regulations. You need to understand the markets as well as laws with regard to foreign investment for the country in which you wish to trade shares. Also ensure that you have reliable sources that will keep you updated on news from that country.
Time Lapse Issues
Do remember that markets across operate according to the time zone of their home country. This means that there could be a delay in the information you get with regard to an investment you may have made in that country.
International share trading is taxed differently from how domestic shares are taxed. So if you are investing in international shares, the best thing you can do is seek professional tax advice.
Interestingly enough, there is a very small segment of Australians who invest in international shares. In fact, CommSec reported that just 10,000 customers, less than 1% of the broker’s 1 million clients, has international trading accounts.
The thing is current valuations of the AUD mean it actually makes sense to invest in other less over-blown markets.