The phrase "international investing" most often refers to a type of investment that involves purchasing securities that originate in other countries. This type of investment is popular because it can provide diversification and opportunities for superior growth. There are many different ways to invest internationally including through mutual funds, exchange traded funds (ETFs) and American depository receipts.
Businesses can also increase their footprints, access new markets and expand sales and profits by investing overseas or across borders. This often called "foreign direct investment." Understanding different international investment definitions will help you decide which might be right for you.
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It Improves Diversification
International investing is a procedure that many investors choose to get involved in by investing money outside of their domestic market. For example, instead of holding a portfolio of only domestic stocks and bonds, an investor could purchase some stocks from a foreign country or buy shares of a mutual fund that specializes in international investment.
Another international investment meaning relates to business activity. A business might open a factory overseas and sell into that country's market, or use intermediaries to sell its products overseas. The business might pay for marketing, or let its intermediary handle promotions in exchange for a bigger share of profits. In many cases, countries limit the amount of foreign direct investment to protect their markets and avoid profits being siphoned out of the country back to investors.
Types of Foreign Investment
There are several ways that you could choose to invest internationally. Mutual funds and exchange traded funds are one of the most common methods. This allows you to invest money in a fund and then the fund manager buys foreign investments. Another method is the American depository receipt. This is an investment in which an investment bank purchases shares in a foreign corporation and then issues domestic shares that can be traded on the stock exchange.
Businesses might purchase foreign companies that sell similar products under a different brand name, or simply take advantage of an opportunity to make profits in a hot market by acquiring a player in that market. Or, a business might acquire a foreign company with a technology or patent that can help the domestic business.
Benefits of International Investments
There are a few benefits that you can realize by investing internationally that may not come with traditional investments. By investing internationally, you can diversify your portfolio more than you could with only domestic investments. If the economy of your country performs poorly, having money in another economy can keep the value of your portfolio up.
Another benefit of this type of investment is that it can provide large amounts of growth. Many investors focus on emerging markets of the world where there is ample opportunity for growth.
Risks Involved With Foreign Investment
There are some risks associated with international investing. One of the most prominent risks is the risk of changes in the exchange rate. If you invest in a foreign bond, for example, by the time you get your principal back, the exchange rate could have moved against you and your investment may not be as profitable as you had hoped.
Many foreign companies also do not put out as much information for investors, so making an educated decision can be difficult. Investors also need to be aware of the political stability of the country in which they are investing, as well as its risk for natural disasters.
Factoring in Liquidity
Some types of foreign investment also have lower than average levels of liquidity. When you trade domestic stocks and funds, you generally have plenty of traders to trade with. With some foreign stocks and American depository receipts, there is a low amount of volume, which could make it difficult to buy and sell your shares. This makes some forms of international investing a more riskier form of investment than many would prefer.