Why Invest in Foreign Markets?
Investing in foreign markets can provide you with more diversification in your portfolio. If you hold too much of your stocks in the Singapore market, any adverse economic, geopolitical, or market events specific to Singapore could significantly reduce the value of your portfolio.
The risk and reward ratio of your portfolio can also be improved by including foreign equities, because the potential for growth in some foreign economies (particularly in emerging markets) may be higher.
However, there are also several risks involved.
Market Risk
Before investing in foreign markets, you should consider the economic risk, interest-rate risk, political risk of the country where the foreign companies are located. In countries where leadership and government is unstable, the stock prices are generally more volatile, because investors in these stocks are more likely to sell off their investments, if the political situation in these countries deteriorate.
Currency Risk
If you invest in foreign markets, you will be exposed to exchange rate fluctuations. Unfavorable currency movements may negate any potentially gains. Before you invest, you should analyze the currency trends and determine if it is favorable.
Liquidity Risk
Before buying any foreign stocks, you should take into account the number of issued shares traded on the foreign exchanges. If the foreign stock is not liquid, you may not be able to buy and sell the stock easily. In general, stocks listed on the exchanges in the developing countries, are usually less liquid compared to those listed in developed countries.
Tax Rates
You should also find out if capital gains and dividends received from foreign investments are taxable. Be a smart investor by adopting investing methods that would maximize returns, while minimizing costs.
Other Considerations
Other factors like the market structures, regulations, time zones, and the trading hours of foreign exchanges in which a proper trade could be timed and executed, should also be considered.
Whether you want to invest in foreign markets or not, you should always do some research before investing your money. If you need professional advice, do contact your trusted FLA Organization Financial Planner for more investment insights today.
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