Private investors sometimes tend to invest primarily in their home markets for many reasons, one of them being the preference for the home country (domestic bias). For example, Nigerian investors tend to favour Nigerian equities. However, investing in foreign stocks in international financial markets can potentially prove beneficial to your stock portfolio.
This article discusses investing in foreign stocks, its benefits, risks, taxation, costs, and provides you with more information on international investing using some platforms.
Why invest in foreign stocks?
Investing in foreign stock exchanges, for example by buying US stocks, has certain advantages. Indeed, whether you are planning to invest in world-famous American companies, or in niche European companies, it can do you a whole world of good. Advantages include.
1. Diversify your stock portfolio
Buying foreign stocks is an easy way to diversify your portfolio. Suppose your portfolio is made up of domestic stocks only. If your country’s economy experiences a crisis, it will have a significant negative impact on your portfolio. On the other hand, if you hold shares from different countries (and also denominated in different foreign currencies, in the dollar or the euro zone) in your portfolio, then you spread the risk associated with the investment.
However, diversifying your stock portfolio is not just about investing in foreign stocks to diversify geographies. Investing in companies from different industries, as well as various financial products, such as bonds and ETFs , can also help diversify your portfolio.
2. Investing in growing economies
Investing in international financial markets can also allow you to benefit from the growth rate of some economies. For example, by investing in a stock market in a still developing country (emerging countries, for example), you can participate in its growth, and potentially profit from it in the future.
3. Benefit from a wider choice of investments
Finally, investing in foreign stocks in international financial markets gives you the flexibility to buy and sell a wider range of products, rather than being limited to stocks available in your home market.
Some countries may also offer different investment possibilities. For example, stocks related to the cannabis industry are available on the US and Canadian stock exchanges due to the legalization in force around cannabis in these countries. You cant buy that in Nigeria.
How can I invest in foreign stocks?
Now the question you have been eagerly awaited. In order to buy shares on the stock market, you must first open a securities account with a broker.
If you want to invest in international stocks, it is important to learn about the different foreign exchanges available for trading, as well as the investment options offered by the different brokers. Some brokers gives different options based on location.
After opening your account, you can invest in foreign stocks directly or indirectly. What is the difference in the two?
Direct investment
Direct investment in foreign stocks consists of buying stocks of companies domiciled in a foreign country. You thus hold part of the capital of one (or more) company (s) domiciled outside your country of origin.
Indirect investment
You can also invest indirectly in foreign stocks of different stock indexes through ETFs or other investment funds . With an ETF or an investment fund, you do not directly own a part of the capital of a company. Rather, these products tend to replicate the performance of a basket of securities, which may include fractions of shares of foreign companies.
What are the risks of investing in foreign stocks?
Whether you invest in domestic or foreign stocks, there is always a risk of loss. On the other hand, some stock markets and some foreign companies may be riskier than others. High risk can come with high returns, but it can also lead to large losses. When considering investing in foreign financial markets, it is important to consider your investment plan and your tolerance for risk. Below is a list of the risks to consider:
Currency fluctuations (currency risk)
International equities can be denominated in a foreign currency. Thus, currency fluctuations must be taken into account. Exchange rates can have a positive impact when exchange rates are favourable , but also negatively impact your investments. This is the currency risk.
Political risk
If you choose to buy foreign stocks, there may be political risk. Indeed, the political climate of a country can lead to unforeseen losses.
Economic risk
Economic risk can also arise when you buy stocks overseas. If the economy of a country is unstable, it can have a negative impact on your investments and in particular your returns, compared to investments in a country with a stronger and less volatile economy.
Less liquidity
Securities may trade less frequently depending on the size of the foreign market. If liquidity is less, it may be more difficult to buy or sell. It may also take longer to complete your orders.
What is the taxation of foreign stocks?
If you plan to buy foreign stocks in international financial markets, it is important to consider the tax implications. If you bought a share and the company concerned paid a dividend, then taxes must be paid accordingly. Taxes vary from country to country. For example, the purchase of shares in France is subject to a transaction tax of 0.3% called the ‘tax on financial transactions’. If you buy a share in the US, be ready to payresult on the other hand, is paid on income such as dividends or coupons. Its amount is paid to the tax authorities of the country of residence of the paying agency (source country), directly at the time of payment of the income. Withholding tax rates also vary by country, and some countries have tax treaties to avoid double taxation.
For example, if a tax treaty between the United States and your country of tax residence has been established, completing Form W-8BEN may allow you to benefit from a reduced rate of withholding tax on income of United States origin. .
Where to Invest
1. Trove
Trove is a digital investment platform that provides stocks from top economy countries such as U.S, Chinese, and Nigerian stocks, bonds, exchange-traded funds (ETFs), and other securities. You can start with a mere a 1000 NGN or $10 using only your smartphone. They completely simplify the investment process to dummy levels.
You can download the Trove app on the Play Store for Android uses and App Store for iPhone users.
2. Chaka
This is another digital investment platform that provides easy access to stocks listed on the Nigeria & U.S stock exchanges as well as over 40 companies from oil rich countries. Like Trove the minimum amount is also $10 or N1000.
The Chaka app is available on Play Store for Android users.
3. Rise
Set aside $10, and you can start buying US stocks from the Rise platform. There is more. You can chose to let Rise expects help you invest your funds in choice stocks. This would provide more stability, reduce risks and maximize profit. Download the Rise app for Android and IOS at App store and play store.
4. Bamboo
Bamboo is very popular. The minimum trading cost is $20 and it provides real time stocks value in the US, Nigeria and other companies. Get the Bamboo app for iOS or Android as you prefer.
Now You Know
Investing is the new saving. Instead of wasting that money for show off, pick one of the US Stocks and invest your money. You would live to enjoy the results of your actions.
