Is foreign stock considered more risky than local stock and why?
I was told a while ago that foreign stocks are more risky than local stocks. Is this true?
What is considered foreign depends where you are (for example, a US based investor would consider US stocks as local, but someone outside the US would consider the same stocks as foreign). Since local and foreign are relative terms, can the same stock be considered more risky purely because it was brought by a foreign investor? And if so, why?
(7)7 Comments
Sorted by latest first Latest Oldest Best
Others have mentioned the exchange rate, but this can play out in various ways. One thing we've seen since the "Brexit" vote is that the GBP/USD has fallen dramatically, but the value of the FTSE has gone up. This is partly due to many the companies listed there operating largely outside the UK, so their value is more linked to the dollar than the pound.
It can definitely make sense to invest in stocks in a country more stable than your own, if feasible and not too expensive. Some years ago I took the 50/50 UK/US option for my (UK) pension, and it's worked out very well so far.
Foreign stocks have two extra sources of risk attached to them; exchange rate and political.
Exchange rate risk is obvious; if I buy a stock in a foreign currency and there is a currency movement that makes that investment worth less I lose money no matter what the stock does. This can be offset using exchange rate swaps. (This is ceteris paribus, of course; changes in exchange rate can give a comparative advantage to international and exporting companies that will improve the fundamentals and so increase the price of the stock relative to a local firm. The economics of the firms in particular are not explored in this answer as it would get too complicated and long if I did.)
Political risk relates not only to the problems surrounding international politics such as a country deciding that foreign nationals may no longer own shares in their national industries or deciding to seize foreign nationals' assets as happens in some areas. Your home country may also decide to apply sanctions to the country in which you are invested thus making it impossible to get your money back even though the foreign country will allow you to redeem them or sell. Diplomatic relations and trade agreements tend to be difficult. There are further problems in lack of understanding of foreign countries' laws, tax code, customs etc. relating to investments and the necessity to find legal representation in a country you may never have visited if there are issues.
There is also a hidden risk in that, as an individual investor, you are not likely to be reading the local financial news for that country regularly enough to spot company specific issues arising. By the time these issues get into international media its far too late as all of the local investors have sold out of their positions already.
The risks are probably no different if you have the time to monitor international relations and the foreign country's news, and have FX swaps in place to counteract FX risk as the funds and investment banks do but as an individual investor the time required is not feasible.
It is very important to note the strength and reputation of the country's regulatory agency. You cannot assume the standards of say the SEC (US Securities and Exchange Commission) apply in other countries (even well-developed ones). These regulations force companies to disclose certain information to inform and protect investors. The standards for such practices vary internationally.
In addition to @MD -tech's answer:
I'd distinguish between stock of a foreign company traded in local currency at a local exchange from the same stock traded in the foreign currency at a foreign exchange (and maybe with a foreign bank holding your accounts).
The latter option will typically have higher variation because of exchange rate, and (usually) higher risks associated with possibility of recovery, (double) taxation and the possible legal difficulties @MD -tech mentions.
Trading the foreign stock at a local exchange may mean that the transaction volume is far lower than at their "home" exchange.
Holding stock of companies working in foreign markets OTOH can be seen as diversification and may lower your risk. If you only invest in the local market, your investments may be subject to the same economic fluctuations that your wage/employment/pension situation is subject to - it may be good to try de-correlating this a bit.
Of course, depending on political circumstances in your home country, foreign investments may be less risky (though I'd suspect these home countries also come with a high risk of seizing foreign investments...)
The value of a foreign stock is subject to fluctuations in the foreign currency value; this is not the case for domestic stocks.
If you intend to be responsive to news and intraday price moves, for foreign stocks these will often happen while you're asleep (e.g. the Tokyo Stock Exchange opens at roughly midnight UK time).
One risk not mentioned is that foreign stock might be thinly traded on your local stock market, so you will find it harder to buy and sell, and you will be late to the game if there is some sudden change in the share price in the original country.
Terms of Use Privacy policy Contact About Cancellation policy © freshhoot.com2025 All Rights reserved.