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Although you take risks when you invest in any domestic growth stock, international investing has some special risks:
Changes in currency exchange rates. When the exchange rate between the foreign currency of an international investment and the U.S. dollar changes, it can increase or reduce your investment return. How does this work? Foreign companies trade and pay dividends in the currency of their local market. When you receive dividends or sell your international investment, you will need to convert the cash you receive into U.S. dollars. During a period when the foreign currency is strong compared to the U.S. dollar, this strength increases your investment return because your foreign earnings translate into more dollars. If the foreign currency weakens compared to the U.S. dollar, this weakness reduces your investment return because your earnings translate into fewer dollars. In addition to exchange rates, you should be aware that some countries may impose foreign currency controls that restrict or delay you from moving currency out of a country.
Dramatic changes in market value. Foreign stock markets, like all stock markets, can experience dramatic changes in market value. One way to reduce the impact of these price changes is to invest for the long term and try to ride out sharp upswings and downturns in the market. Individual investors frequently lose money when they try to “time” the stock market in the United States and are even less likely to succeed in a foreign market. When you “time” the market you have to make two astute decisions — deciding when to get out before prices fall and when to get back in before prices rise again.
Political, and economic events. It is difficult for investors to understand all the political, economic, and social factors that influence foreign markets. These factors provide diversification, but they also contribute to the risk of international investing.
Lack of liquidity. Foreign stock markets may have lower trading volumes and fewer listed companies. They may only be open a few hours a day. Some countries restrict the amount or type of stocks that foreign investors may purchase. You may have to pay premium prices to buy a foreign security and have difficulty finding a buyer when you want to sell.
Less information. Many foreign companies do not provide investors with the same type of information as U.S. public companies. It may be difficult to locate up-to-date information, and the information the company publishes my not be in English.
Reliance on foreign legal remedies. If you have a problem with your investment, you may not be able to sue the company in the United States. Even if you sue successfully in a U.S. court, you may not be able to collect on a U.S. judgment against a foreign company. You may have to rely on whatever legal remedies are available in the company’s home country.
Different market operations. Foreign stock markets often operate differently from the major U.S. trading markets. For example, there may be different periods for clearance and settlement of securities transactions. Some foreign markets may not report stock trades as quickly as U.S. markets. Rules providing for the safekeeping of shares held by custodian banks or depositories may not be as well developed in some foreign markets, with the risk that your shares may not be protected if the custodian has credit problems or fails.
Two of the chief reasons why people invest internationally are:
1. Diversification
Spreading your investment risk among foreign companies and markets that are different than the U.S. economy.
2. Growth
Taking advantage of the potential for growth in some foreign economies, particularly in emerging markets.
By including exposure to both domestic and foreign stocks in your portfolio, you’ll reduce the risk that you’ll lose money and your portfolio’s overall investment returns will have a smoother ride. That’s because international investment returns sometimes move in a different direction than U.S. stock market returns. Even when international and U.S. investments move in the same direction the degree of change may be very different. When you compare the returns from emerging international markets with U.S. stock market returns you may see even wider swings in value.
Of course, you have to balance these considerations against the possibility of higher costs, sudden changes in value, and the special risks of international investing. Next we will cover the risks of international investing.
The stock market has its ups and downs…and that’s quite frequent. You can say, it behaves like a roller coaster that goes wild at times. With a smart investment plan it’s just possible to win from stock market consistently. This is what the history of stock market says for the last 50 years or so. No, I am not saying this to discourage you in anyway. It’s a simple fact that I wanted to narrate before discussing about a market which is the center of the economy. You can simply throw way your job in trash, if you know when and where to invest. And mind you, a wrong investment can loose you everything. Finally, stock market is not the game for a chicken heart. Here are a few steps and tips that will guide you on how to earn well from a stock market.
Step 1:
Select the company where you intend to invest. Go through the business section of any standard newspaper. There you will find the companies listed in the stock exchange and the details relating to their price per share etc.
Step 2:
After you are done with the selection, you need to decide about the number of shares you can or want to purchase. Don’t forget to include the commission of the stock-broker in the total price.
Step 3:
Now, call up a broker and inform him about the company you have selected and the number of shares you have decided to buy. Once you do this, the broker will pass on the purchase to a floor broker. This floor broker will make the purchase as per your requirement from that company.
Step 4:
Keep a track on the growth stock price everyday through newspapers or internet. This will help you in checking out in any drastic rise or fall in the prices of stocks you have purchased. With this you can determine whether to keep them or sell off.
Tips….
Know the golden rule. Purchase your stock when you find the price low and sell them when it’s high.
Stock prices might fall, but never get panicked for that. If your company has a proven track record stay with it. Good days will be back and surely you are going to earn handsomely in the long-run.
If you ever find your stock picks rising with an abnormal speed, just sell them before the graph dips and comes down hard.
Be cautious if it’s a new or expanding organization. There is a great deal of risk to invest in such companies.
You can’t open a newspaper or read stock market news without seeing ads promoting the stellar performance of “hot” mutual funds in the stock market. But as a good investor you know from the stock investment advice that past performance is not as important as you may think, especially the short-term performance of relatively new or small funds. As with any investment, a fund’s past performance is no guarantee of its future success. Over the long-term, the success (or failure) of your investment in a fund also will depend on factors such as:
Mutual fund’s sales charges, fees, and expenses;
Taxes you may have to pay when you receive a distribution;
Age and size of the fund;
Mutual fund’s risks and volatility; and
Recent changes in the fund’s operations.
So, look beyond the fund’s past performance when making your investment decisions. Read the fund’s prospectus and shareholder reports, and consider these tips:
Analyze the mutual fund’s fees and expenses.
Every mutual fund charge investors fees and expenses. A mutual fund with high costs must perform better than a low-cost fund to generate the same returns for you. Even small differences in fees can translate into large differences in returns over time. For example, if you invested $10,000 in a fund that produced a 10% annual return before expenses and had annual operating expenses of 1.5%, then after 20 years you would have roughly $49,725. But if the fund had expenses of only 0.5%, then you would end up with $60,858. It is almost a $10,000 difference.
Know your tax bill and learn how the fund will impact it.
The law generally requires a fund to make a capital gains distribution to shareholders if it sells a security for a profit that can’t be offset by a loss. If you receive a capital gains distribution from a fund, you will likely owe taxes on it – even if the funds has had a negative return since you invested in it. For this reason, you should call the fund to find out when it makes distributions so you can time your investment in the fund to avoid receiving a capital gains distribution immediately upon investing and paying more than your fair share of taxes. Some funds post that information on their websites.
Next time we will go over five more aspects to consider while investing in the mutual funds.
Stocks
Usually called common stock in the United States. Other words describing stocks are ‘stocks’, ‘equities’ and ‘securities’. When you buy an ordinary stock, you are buying a stake in a business. Whether you own one or a million stocks in, say, ABC Inc., you own part of that company. Owning stocks in a company gives you the right to attend its Annual General Meeting, vote, and ask awkward questions if you feel the directors or chairperson are not running the business in the right way. If the company does well, your stocks will increase in value over time and you will also benefit from steadily increasing dividends. Unfortunately, the contrary is also true. In a worst case scenario, if a company goes belly up, ordinary stockholders are at the bottom of the pile when it comes to being paid out by the receivers.
There are all kinds of stocks that span the spectrum of risk. In fact, in the event of a company going bust, there is an order of payout to stockholders depending on the type of stocks they hold.
It’s worked out by priority percentages and is different for each case. The order of payout is as follows:
1. Mortgages and debentures secured on specific assets;
2. Debentures secured on the general assets of a company;
3. Unsecured debentures and loan stock (loan stock equals bonds);
4. Preference stocks;
5. Ordinary stocks.
A small test for the reader. What is a blue chip stake?
(A) A new dish by Gordon Ramsay;
(B) Making kids eat their food by dyeing their vegetables; or
(C) A holding in a solid company?
Correct answer (C).
Stock Split
This is when a company takes each stock and splits them into more than one. So let’s use an easy example. Stocks in ABC Inc. are each trading at $10 on the stock market. They have a nominal (face) value of $1. A five-for-one split will result in the stocks being worth about $2 on the stock market (sometimes they trade a little higher on positive feedback from investors who perceive the stocks to be more tradable). And the face value of each stock is now a fifth of the original, ie, $0.2. This is not the same as a bonus issue.
Short-Term Investment
How long is a piece of string? I mean, short term could be three minutes to a stocky, rugby-playing City trader, and three years to someone else. I buy with a view to the longer term, more like five years. The only way I would suddenly become more short term is if I felt the goal posts had changed and I had made a hideous investment mistake. Short-termism can infect anybody, even the gurus of investment, like Warren Buffett.
Stepped Preference Stocks
These are similar to preference stocks in that they pay a predetermined dividend to their owners. What distinguishes the ‘stepped preference’ variety from straightforward preference stocks is that each dividend payment is stepped, rising at regular intervals each year. Other ‘prefs’ just pay a fixed, unchanged dividend over their lifetime. Like preference stocks, they rank before ordinary stockholders in the unfortunate event of a company going belly up.
Stockbroker
(Q) ‘What do you call 100 stockbrokers at the bottom of the ocean?’
(A) ‘A good start!’
You and I cannot just go into the stock market and pick up 100 stocks in Verizon. We have to employ the services of a stockbroker (or broker, which means the same thing). In the City, the broker acts as an agent between buyer and seller. He passes stock orders on to professional dealers who then actually transact the business.
There are all kinds of stockbrokers. Private client stockbrokers offer their services to individuals like you and me. Institutional stockbrokers do the same for pensions funds, insurance companies and asset management groups that invest money on behalf of, yes you guessed it, individuals like you and me. If all the broker does is buy and sell stocks for you with price limits set to your liking, then there is not much that can go wrong. If, however, you want a stockbroker to manage your money on a discretionary basis, then you will need to take special care.
Stock Exchange
Stocks used to be traded in a physical ‘marketplace’, an actual floor where the buying and selling of stocks was transacted by a bunch of top-hatted gentlemen (there weren’t any women, needless to say). Well, that’s all gone, and nowadays the ‘market’ is an electronic one, and transactions are all done over the telephone and via computer links.
Stock Index Future
This is a wild bet on the future movement of a stock market index. As it is an out-and-out gamble that carries a potentially unlimited loss if things go wrong, à la Nick Leeson, you, dear reader, are going to steer well clear, aren’t you?
