http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments What Are the Unique Risks Associated with Foreign Investments? In our last two articles we asked why aren’t you investing offshore and wondered about a coming European economic boom. But if you are thinking of putting your money to work outside of the USA, what are the unique risks associated with foreign investments and how can you avoid them? Investopedia writes about the three biggest risks that international investors face. These are transaction costs, currency risks and liquidity risks. The Cost of Investing Offshore Likely the biggest barriers to investing in international markets are the transaction costs. Although we live in a relatively globalized and connected world, transactions costs can still vary greatly depending on which foreign market you are investing in. Brokerage commissions are almost always higher in international markets compared to domestic rates. In addition, on top of the higher brokerage commissions, there are frequently additional charges that are piled on top that are specific to the local market, which can include stamp duties, levies, taxes, clearing fees and exchange fees. Currency Fluctuations and Worse When investing directly in a foreign market (and not through ADRs), you have to exchange your domestic currency (USD for U.S. investors) into a foreign currency at the current exchange rate in order to purchase the foreign stock. If you then hold the foreign stock for a year and sell it, you will have to convert the foreign currency back into USD at the prevailing exchange rate one year later. It is the uncertainty of what the future exchange rate will be that scares many investors. Also, since a significant part of your foreign stock return will be affected by the currency return, investors investing internationally should eliminate this risk. Buying stocks as ADR’s is a simple solution for someone who wants to invest only in foreign stocks. Otherwise you need to know how to use the Forex market to hedge your currency risk. Because currency futures, options and forwards are relatively complex for beginners an alternative might be to use a currency ETF. Of course the worst risk is if a country goes bankrupt, its currency becomes worthless and assets get frozen.

1. B y w w w . P r o f i t a b l e I n v e s t i n g T i p s . c o m
What Are the Unique Risks
Associated with Foreign
Investments?

2. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
In our last two articles we
asked why aren’t you investing
offshore and wondered about a
coming European economic
boom.

3. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
But if you are thinking of putting
your money to work outside of the
USA, what are the unique risks
associated with foreign investments
and how can you avoid them?

4. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
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Before We Continue…

5. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
Investopedia writes about the three
biggest risks that international
investors face.

6. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
These are transaction costs, currency
risks and liquidity risks.

7. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
The Cost of Investing
Offshore

8. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
Likely the biggest barriers to
investing in international markets
are the transaction costs.

9. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
Although we live in a relatively
globalized and connected world,
transactions costs can still vary
greatly depending on which foreign
market you are investing in.

10. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
Brokerage commissions are almost
always higher in international
markets compared to domestic
rates.

11. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
In addition, on top of the higher
brokerage commissions

12. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
there are frequently additional
charges that are piled on top that
are specific to the local market,
which can include stamp duties,
levies, taxes, clearing fees and
exchange fees.

13. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
Currency Fluctuations
and Worse

14. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
When investing directly in a foreign
market (and not through ADRs)

15. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
you have to exchange your domestic
currency (USD for U.S. investors)
into a foreign currency at the
current exchange rate in order to
purchase the foreign stock.

16. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
If you then hold the foreign stock for
a year and sell it, you will have to
convert the foreign currency back
into USD at the prevailing exchange
rate one year later.

17. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
It is the uncertainty of what the
future exchange rate will be that
scares many investors.

18. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
Also, since a significant part of your
foreign stock return will be affected
by the currency return, investors
investing internationally should
eliminate this risk.

19. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
Buying stocks as ADR’s is a simple
solution for someone who wants to
invest only in foreign stocks.

20. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
Otherwise you need to know how to
use the Forex market to hedge your
currency risk.

21. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
Because currency futures, options
and forwards are relatively complex
for beginners an alternative might be
to use a currency ETF.

22. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
Of course the worst risk is if a
country goes bankrupt, its currency
becomes worthless and assets get
frozen.

23. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
Liquidity Issues

24. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
Another risk inherent in foreign
markets, especially in emerging
markets, is liquidity risk.

25. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
Liquidity risk is the risk of not being
able to sell your stock quickly
enough once a sell order is entered.

26. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
There are some common ways to
evaluate the liquidity of an asset
before purchase.

27. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
One method is to simply observe the
bid-ask spread of the asset over
time.

28. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
Illiquid assets will have wider bid-
ask spread relative to other assets.

29. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
Narrower spreads and high volume
typically point to higher liquidity.

30. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
Sovereignty Risk

31. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
This one is our own take on foreign
investment risk.

32. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
If you owned assets in Libya before
Gadhafi took over in the 1970’s you
lost everything.

33. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
The same thing happened in Cuba
with Castro and to a degree in
Venezuela first with Chavez and now
Maduro.

34. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
Unique risks associated with foreign
investments can include having a
strongman take over and nationalize
all private assets.

35. http://profitableinvestingtips.com/forex-trading/what-are-the-unique-risks-associated-with-foreign-investments
Make sure you have a clear sense of
how stable the country is before
investing there.