Jan 25, 2019
Foreign Stocks: Should You Invest in Them?
Just starting to invest? Don’t forget about the rest of the world. Foreign stock markets can help you diversify.
Not all investments are made in America.
But when it comes to putting money in the market, most people tend to think only of investing in the U.S.
That’s because so many familiar companies are here, not to mention important indexes like the S&P 500, the Dow Jones Industrial Average, and the Nasdaq. The U.S. is also the biggest economy in the world.
Still, it’s important to consider foreign investments too. Why? For one thing, it might be a good thing to invest where most people aren’t–by some estimates U.S. investors hold only 15% of their equities overseas.
Fact: Three quarters of all listed stocks are international, and they account for almost half of the total market value of all companies globally, according to research.
Why invest in foreign companies?
Here are two other reasons to consider investing in foreign stocks:
- International stocks can help you diversify. The basic idea behind diversification is to make sure you don’t have all your eggs in one basket. You can diversify by holding stocks in different sectors and industries, as well as in companies of different sizes. (You can also diversify by holding bonds.) And international stocks are another way to diversify your portfolio. Think of it this way–not all economies perform the same way at the same time. While the U.S. is the largest economy globally, and what happens here often has an impact on other economies, there isn’t always a direct correlation. So other economies, and the companies that make them up, can perform well while the U.S. experiences a slowdown, and vice versa.
- Growth potential. The U.S. is considered a mature economy, which means its annual growth potential typically hovers in the single digits. In contrast, many economies in developing countries and elsewhere have the potential to grow at more dramatic rates. In fact, emerging economies have been responsible for two-thirds of global growth in the last 15 years, and half of all consumer consumption, according to research.
How do you buy foreign stocks?
U.S. investors can buy foreign stocks through various ETFs and mutual funds that specialize in overseas investments. In that case, you’ll be buying shares in a fund that invests in a basket of stocks.
Investors can also purchase individual stocks of foreign companies trading in the U.S.
Typically U.S. investors invest in foreign stocks through something called an American Depositary Receipt, or ADR. It’s essentially a certificate issued by a U.S. bank that specializes in trading, which represents shares of the foreign stock, and it trades on a U.S. exchange like a regular stock.
It’s important to know that one ADR doesn’t necessarily represent one share, it typically represents a batch of shares. So, for example, if you purchased $100 of a foreign company’s ADR, it would be worth a corresponding number of shares held by the ADR.
You don’t have to worry about the technical mechanism so much. The ADRs will appear just like a regular stock offered by your broker or trading app.
What are the fees and tax implications of foreign stocks?
If your foreign stock pays a dividend, you’ll owe taxes on it—both in the country where the company is located, and here in the U.S. To avoid double taxation, the U.S. federal government offers a tax refund for the foreign tax, but you’ll still owe taxes on the dividend amount in the U.S.
From time to time, the bank that holds the ADR may charge administrative fees for handling the foreign shares, often charged as a percentage of each share you own. You can find out more about those fees by checking the prospectus for the stock’s ADR.
Go around the world with Stash
Stash lets you buy fractional shares of stocks of some foreign companies. You can also purchase ETFs that represent different parts of the world, from Europe to Asia.
Special note: This material has been distributed for informational and educational purposes only, and is not intended as investment, legal, accounting, or tax advice. Please consult a tax professional for answers to specific questions.
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