Get a better understanding of what international stocks are and how you can incorporate them into your trading or investing strategy.
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It's almost impossible to avoid international exposure in today’s globally interconnected economy. With more than half the world's market capitalization now lying outside the United States, international stocks present a wide range of opportunities simply unavailable with domestic stocks. Many leading stock exchanges are based outside of the U.S., offering investors potential to expand and diversify their portfolios with securities in both emerging and well-established markets. Global diversification can help you manage risk and position your portfolio for long-term growth.
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We believe a global perspective that incorporates portfolio allocations to U.S. and international stock markets along with global benchmarks for performance are vital to successful long-term investing.
A global perspective takes the decision about what country’s stocks to invest in and refocuses it on seeking to invest in great ideas that span the stocks of many countries. It requires measuring investment success differently and taking a long and broad view to help manage risk and keep tracking toward goals. The right mix of assets for you and your goals should be based on your risk tolerance, cash flow needs, investing experience and time horizon, among other factors.
Risks of international stocks
In addition to different trading regulations and protocol, international stocks also carry their own unique risks that investors should consider.
While currency fluctuation can work in favor of the U.S. dollar, it’s always a variable and investors should be prepared for favorable and unfavorable outcomes.
Investing in international stocks is investing in the people and governments where the foreign shares are located. Political or economic events in a foreign company’s home country may harm your investment.
International stock exchanges have their own rules and regulations for participating countries and organizations. Changes in governance and financial policies can create limitations on the access rights of foreign investors.
Taxes on international investments are often taxed at different rates than domestic holdings. Similar to regulatory changes, some foreign nations may also impose additional taxation on foreign investors.
International stocks FAQs
While international stocks are subject to geopolitical, regulatory, and currency risk, a foreign security should not be judged solely because it is not a U.S. domestic product. Investors should take multiple factors into consideration when considering investing in international stocks, such as geographical location, level of development, and liquidity of the markets and complex tax regimes. Additionally, U.S. domestic securities can be just as risky as some foreign ones.
Taking a global perspective means incorporating both U.S. and international stocks in your portfolio. The market place is truly global and when it comes to investing, geographical location matters a lot less than it used to. Depending on your return objectives and risk tolerance, your international allocation should be 5-25% of your total stock market investments and the international weighting necessary for truly global exposure is likely to increase over time as global trends become even more entrenched. Investing in international stocks still carries risks, but if you limit your international exposure you may miss out on attractive growth opportunities as well as the increased diversification that can help buffer your portfolio against market downturn.
Simply put, home bias (or 'home country bias') is the conscious or unconscious choice of investors to invest the entirety or majority of their assets in domestic investment products – we're inclined to believe in and root for the things that we know best. While this may be human nature, home-country bias limits an investor's universe of available opportunities. Worse, it may not be prudent given the nature of today's global markets: roughly half of all global companies are based outside the United States, which corresponds to global gross domestic product ratios.
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When investing in international stocks it is beneficial to understand the differences between developed, emerging, and frontier markets to better comprehend the risks, potential, liquidity, and stability of international investment products.
- Developed Markets (DM) are countries who are economically the most advanced – they have highly developed capital markets, are well regulated with higher per capita income, and have a large market capitalization and greater liquidity. They include, but are not limited to, such countries as the U.S., Canada, the United Kingdom, Germany, Australia, and Japan.
- Emerging Markets (EM) are countries which are currently experiencing rapid economic and household income growth as well as rapid industrialization. As opposed to developed markets, they tend to have lower household incomes, economic development and reform programs under way, less maturely functioning stock and bond markets and rules of conduct, lower liquidity, and are undergoing structural changes such as modernization of infrastructure and/or moving from a dependence on agriculture to manufacturing. Brazil, Russia, India, and China are examples of some emerging markets.
- Frontier Markets (FM) are another subset of international investing which may become future emerging markets. They tend to be even less developed, have higher levels of risk than emerging markets, little market liquidity, and only marginally developed market systems. Some markets considered frontier are Colombia, Indonesia, Turkey, and South Africa.
It is important to note that these are not fixed definitions; different financial bodies differentiate between developed, emerging, and frontier markets using varying criteria and what one entity might characterize as emerging could be considered developed by another.
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Dividends paid on foreign equities are generally subject to foreign tax withholding. These taxes vary greatly depending on jurisdiction, residency, and account type and are governed by applicable international tax treaties between the U.S. and the issuer's country of registration. In certain circumstances, investors may be eligible for preferential rates which are lower than the statutory rates applied by local jurisdictions.
Your approach to investing globally depends on what type of investor you are. In addition to ADRs and foreign ordinaries, investors seeking global diversification should consider exchange-traded funds (ETFs) and mutual funds with concentrations in international holdings as well as other non-traditional investments such as international REITs. You can invest in international stocks on your own with a Schwab One® brokerage account or call our Global Investing Services team at 800-992-4685 to speak with a dedicated broker about foreign trading.1 Our team is available between 5:30 p.m. ET Sunday and 5:30 p.m. ET Friday.
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