Trading in international shares can give you many more stock investment options that just those listed on the Australian stock exchanges (the Australian Securities Exchange, the National Stock Exchange of Australia and the Chi-X Australia). A diversified portfolio of investments also reduces the risks of putting all your eggs in one basket.
Despite the fact that investing in international shares can be of great benefit, the majority of investors still hesitate to invest in foreign shares. Here are some of the reasons why many investors do not take that final step to investing in international shares:
Higher Transaction Costs
One of the biggest barriers to investing in foreign markets are the transaction costs. Trading in shares internationally, especially if you are doing so through a broker or on an online trading platform, incurs much higher costs. Brokerage commissions are almost always higher for international trading.
In additions to broker’s fees, there are other charges such as levies, taxes, exchange fees, etc.
Typically, brokerage fees can range from $20 to $60 per transaction for trades up to $10,000. For larger transactions, the brokerage fees is around 0.40% of the total transaction amount.
Foreign exchange fees are applied to all international trades and the exchange rate will depend on the Forex market when the transactions is executed. For example, CommSec charges a 0.6% fee on Foreign exchange for USD. If you trade in currencies which have certain restrictions, then the bank charges an additional spread.
Other fees that CommSec charges for an international trading account include Custody fees for inactive accounts ($25 per year), Posted trade confirmation fee ($1.80 per trade confirmation) and posted statement fee ($1.80 per statement).
If you are investing through a professional fund manager, then you will have to pay even higher fees. You would basically be paying for the professional’s knowledge about foreign markets, which (you hope) will garner better returns for you.
Fluctuating exchange rates or currency volatility is another major factor that can impact the amount you make from international share trading. You would need to lock in an agreed exchange rate before you trade on a particular share.
Now, when the currency starts to fluctuate, things could go either way for you. If the AUD rises against the currency you are trading in, you could end up with a loss. If you’re lucky, however, and the AUD weakens, you could end up with gains.
One way to protect your investments from currency fluctuations is by hedging your currency exposure. This is a financial tool similar to taking out an insurance policy. For example, if you live in a flood-prone area, you would take out flood insurance. You may never need to cash in on that insurance policy, which means that investment was for naught. However, losing a little bit of money to pay insurance premiums is a safer option than losing your home or your property.
Similarly, hedging a currency risk using financial tools such as currency futures or options reduces the impact of currency fluctuations. While most tools are very complicated, a simple tool that you can use is the currency ETF.
This is a real gamble with money that many investors are reluctant to make.
There could be instances when you cannot sell your shares because of very low trading volumes or if a particular business decides to stop trading. This kind of risk is especially true for emerging markets. Unfortunately, there is generally no way for you to protect yourself from liquidity risks – there is nothing much you can do.
There are, however, a few ways in which you can check the liquidity of a stock before you buy it. One simple way to do so is to simply observe the bid-ask spread of the stock in question. Narrower spreads and high volumes usually mean higher liquidity.
The politics of a country has a very strong impact on the stock market. International shares, just like all other shares, are impacted by their country-specific risks.
While it is easy to keep up with the changes taking place in Australia, it is much more difficult to keep abreast of happenings in the countries in whose stocks you are trading.
It is necessary to understand local market dynamics, the impact of local politics as well as laws related to foreign investments in the country you have chosen to invest in.
Access to Research
Information on international businesses may not be as easy to find as it is on domestic shares and companies. Getting access to research, or even paying for it is difficult – not to mention expensive.
All markets operate in their own time zones. This is a risk because there could be delays in information reaching you which could impact your decisions to buy or sells international stocks. Trades will similarly be delayed due to this.
International shares are taxed differently from domestically held shares. If you do own foreign assets, then you need to include any capital gains or losses made on those in your tax returns.
The Australian Tax Office details what you need to do to file taxes on your international stocks and shares. However, to be on the safe side, it is better to take professional taxation advice before filing your returns so that you don’t make any mistakes.