Introduction
Our countries are globally connected and the change in one country affects the other. The stock and the bond market form an integral part of the country' wealth and development. Though there are benefits in investing in international market but there are also high risk in these transactions. To have better idea whether to invest in international market or not we will discuss about the advantages and disadvantages of investing in the international market.
Advantages of Investing in International Market
When a country invests in the international market it increases the holding of foreign stocks other than domestic ones. The portfolio becomes more diverse and there is less risk to incur loss. When an investor invests in the stock market of the domestic country then it is better to have a diverse portfolio so that a loss in one sector of the market is offset by the gain in the other sectors. Likewise, the diversification helps to balance the portfolio by investing in international market. The risk of holding stock of only one's own country in comparison to holding stocks of other countries is less.
The emerging economies are growing at a fast rate so it is more profitable for the foreign investors to invest in these emerging markets with the possibility of huge gain.
The exchange rate is also affected due to investment of various countries in the international market. The exchange rates being very volatile provides profit for the country investing in the international market when the currency rises and reverse happens when currency falls.
In the domestic market the rise in the interest rate affects the exchange rate and in turn affects the foreign investors. The inflation of the country affects the country's exchange rate and also to the foreign investment.
The political situation of the country determines foreign inevstment. For example, if there is political turmoil in a country then it will affect the stock market of the country and the foreign investors. But although if the country has formed a new government and the country men have expectation towards the government then the stock market will rise which will also cause the rise in the foreign investment.
The fluctuations in the stock market are caused due to changes in the price of crude oil. Other metals like gold and silver also affects the stocks market of all countries. There is inverse relation with the rise in gold prices to the rise in stocks. When gold price decreases the foreign investment increases.
There are various tax incentives for the foreign investors. It also draws the investors to the foreign countries with low tax rate
Cons of Investing in International Market
But there are demerits investing for countries like U.S where the tax revenue is loss for investing in the foreign countries. Countries sometimes impose regulation which causes the problem of discouragement among foreign investors.
The account that the foreign companies hold in the domestic country is sometimes costly as there are legal fees, corporate registration fees which makes it difficult for the foreign investors to earn more profit .
Then there is the currency risk. Exchanging the domestic currency to foreign currency incurs loss for the investors. This area is very volatile and slight movement of the currency can decide whether the investors will gain or face loss.
Another problem in dealing with foreign market is that some countries do not offer facilities to liquidate currencies. It means that the stocks cannot be sold quickly. The stocks cannot be liquidated i.e. cannot be easily converted to their currency in a short span of time.
The political situation of a country if not stable then creates the problem for the foreign investors. If the country is having huge deficits then by applying various monetary policies the country will increase its tax rates and cut government spending. This will affect the stock market of the country and the investors.
Conclusion
Though there is risk associated with investing in international market still there is scope of growth for the countries. U.S being the largest economy and stock market in the world it is beneficial to invest in U.S stock market. U.S companies have international operations but U.S economy is growing at a slower pace. But the emerging markets are growing at a fast rate. The opportunities are high in these emerging economies as they more scope of growth in the future. They are outperforming the developed nations. The stock market of the emerging economies had declined but performed well than the developed economies during global depression. So with proper research and analysis investors may invest in international market.
References
Gibley, M. (2016). Why Invest Internationally?. Schwab.com. Retrieved 28 May 2016, from http://www.schwab.com/public/schwab/nn/articles/Why-Invest-Internationally
International Investing | Investor.gov. (2016). Investor.gov. Retrieved 28 May 2016, from https://www.investor.gov/news-alerts/investor-bulletins/international-investing
Trading, Investing & Retirement | Scottrade. (2016). scottrade.com. Retrieved 28 December 2015, from http://www.scotttrade.com/knowledge-center/articles-insights/long-term-strategy
SEC.gov | International Investing: Get the Facts. (2016). Sec.gov. Retrieved 28 May 2016, from http://www.sec.gov/investor/pubs/ininvest.htm
