A brief guide to international investing

Foreign markets make up close to 50% of all opportunities for investing in stocks and bonds. As the world of business becomes more globalized, investors are seeking new avenues to invest and diversify with, but there are special issues to consider when investing in foreign markets. There can be great advantages to investing internationally as long as you keep the risks in mind. Most investment advisors recommend diversifying your portfolio with 10% to 20% of your investments being made in the international markets. A good understanding of your specific goals and the additional risks are important to making sound investment choices.

When investing in foreign markets, it is important to keep track of the exchange rate between the market currency and the US dollar. The impact of the exchange rate is opposite to the rise or fall of the dollar. For example if you were to invest in the German stock exchange, the Deutsche Börse AG, you would need to keep track of the exchange rate between the US dollar and the Euro. As the Euro rises against the US dollar, you will earn more, if the dollar rises, you will earn less. The stronger the dollar the less a US investor will earn over time in a foreign market. Diversifying in several foreign markets can help mitigate the risk and still allow an investor to reach the higher returns available from other markets.

One option for global diversification in your portfolio is to purchase American Depository Receipts. ADRs are the easiest way to purchase foreign shares. American banks issue ADRs and the certificates represent indirect ownership in specific foreign firms. ADRs allow an investor to buy, sell, and receive all dividends in US dollars, making the tax paperwork much easier to follow. If a company pays dividends those payments are sent through a US clearinghouse and promptly paid in US dollars.

Publicly traded sponsored ADRs are registered with the Security Exchange Commission (SEC). There are two levels of sponsored ADRs; Level I ADRs are typically purchased OTC and generally represent either smaller companies or companies that cannot list on the larger exchanges. The Level I ADRs are exempt from US reporting rules. Level II ADRs are listed on the NYSE or Nasdaq exchanges and must report using the SEC Form 20-F.

Direct purchases of foreign stocks are made through one of the foreign exchanges in the foreign currency. Direct purchases usually have slightly lower transaction costs, but the costs of changing currencies can limit the advantage. If you want to invest in a specific foreign company, however, it may be the best way for you to do that. To find out which exchange the company you are interested in works with, use the company website for investor information.

Many US investment firms offer a third alternative. You can purchase global mutual funds that are diversified across many countries. These individual funds are available with concentrations in a given market (such as the German Stock Exchange), region (such as South America or Europe), or specific industries (such as high tech or energy related stocks). These mutual or bond funds offer a great way for you to invest internationally and still be able to make easy trades. Most of these mutual funds are listed on the New York Stock exchange and can easily be purchased through your broker.

To find foreign market investment opportunities or to learn more about the markets some great resources are the World Federation of Exchanges (http://www.world-exchanges.org), The Bureau of Economic Analysis (www.bea.gov), or the Federal Reserve (www.federalreserve.gov).

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