Globalisation is a phenomenon that has transformed the global market like nothing else in history. It has created a situation where cross-country interaction in terms of trade and of products and services have grown at a rapid rate. This has had implications as well, the main one being the spectacular rise of the emerging markets.
The technological advancement and close economic relationships among the majority of the countries across the world also mean that it presents an opportunity for the investors to invest in different markets and get attractive returns. Today, investment opportunities are no longer restricted to certain geographical boundaries. Successful investors are becoming increasingly aware of the happenings in the emerging economies and taking advantage of booming growth. Unfortunately, many investors are unaware of the benefits and the procedure of investing in the global arena. The following are some of the ways that you can start investing in global equities –
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Table of Contents
Direct Investment
Direct investment as the name suggests allows the investor to directly purchase or sell stocks and shares in the international market. This can be done in two ways. The first and the most common way is to open a global trading account with a reputed broker in the country of origin. This can be done with any of the brokers that you may have a Demat account with. The other but more complicated approach is to open a trading account within the target country’s local broker.
One thing that an investor must know before investing directly in a foreign market is that it is an option strictly for the experienced and serious investors and it should not be ventured into by casual by casual or beginner investors. The entire system of investing directly in a foreign market can be somewhat complicated and confusing as it includes different cost structures, tax implications, currency conversion, technical support, access to thorough research, and much more. Thus, primarily only active, skilled and experienced investors should delve in it.
There also lies the risk of many fraudulent activities by brokers around the world. Hence, when picking a broker, an investor should always check if the broker is registered with a market regulator in the country of investment, similar to a body like the Securities and Exchange Board of India (SEBI).
2. Mutual Funds
If you are an investor who is not willing to go through the hassles of direct investing, then you investing in international mutual funds is a good idea. Moreover, if you have already invested in mutual funds in your country, then that experience will definitely be of aid as the process, and the dynamics are very similar at the international stage as well. These funds can be categorized in the same bracket as traditional mutual funds when compared on the basis of their benefits and the way that they work. The only difference is that the international mutual funds hold a portfolio of foreign stocks as compared to that of domestic stocks in case of the regular mutual funds.
The international mutual funds offer a wide range of flavours; hence it caters to the needs of different types of investors around the world over, be it the risk-averse conservative investors or the aggressive risk-taking investors. The international mutual funds include country-specific or region-specific funds, global funds, international index funds, and international funds. In the case of the international funds, the cost of investment is understandably higher than the mutual funds sold at the domestic market.
3. Exchange-Traded Funds (ETFs)
The international exchange-traded funds provide a convenient and profitable platform for investors all over the world to freely access foreign markets. The reason it is often the first step towards international investment for many investors is that it is much simpler to pick the correct exchange-traded fund as opposed to careful construction of a portfolio by selecting each stock individually.
You can either choose to pick a single exchange-traded fund or a group of exchange-traded funds in a specific country. The advantage of picking a group of ETFs is that they tend to offer a more focussed bet within a country. An investor also has the option of choosing from a number of categories like market capitalization, sectors, geographical region, and investment style and so on.
When investing in the exchange-traded funds, the crucial aspect is research. Without thorough research into the ETFs and the country that one intends to invest in, the risk factor is significantly increased. Thus, it is imperative that you research the costs, fees, taxation, liquidity, trading volume and portfolio, prior to investing your hard earned money on international exchange-traded funds.
4 . Multinational Enterprises
Investing the multinational enterprises or multinational companies is a way to invest in familiar conditions internationally. This is ideal for those people who do not feel ready to buy foreign stocks directly or are skeptical about investing in international mutual funds. Under such circumstances, an investor can pick a domestic company with an international presence (the meaning majority of its sales and revenues come from the international market). It is often a safe idea to go with some of the giants in the industry as they are a safe option and they get a huge volume of their profits from the international market.
Although technically it does not give the investor a stake in international growth, it has been used by many to increase their returns significantly. Thus, this back door entry strategy is common even though it fails to offer international diversity in the true sense.
Apart from the options mentioned above, you can also check out the benefits of depository receipts – the American depository receipts or the global depository receipts. Both of these options provide convenient ways to purchase foreign stocks. The American variant is used by many companies to establish their presence in the United States of America. Whereas, in case of a global depository receipt, one of the top depository banks issue shares of various foreign companies in the international market and makes them available internationally.
Importance of Homework
It is never a good idea to invest internationally without doing your homework. You should gain prior knowledge in respect to the economic and the political environment of the country that you intend to invest in, as this could play a major role in determining the value of your investment returns. Like in domestic investments, it is also important to keep in mind the investment objectives, prospective returns and costs while balancing these factors with the risk that you are willing to take. Overall, if these factors are kept in mind, the process can be simplified to an extent.