How to invest in international stocks
With more than half of global market capitalization outside the U.S., international stocks provide access to a diverse range of opportunities unavailable in domestic markets. Investing in companies located outside of the United States allows you to tap into both emerging and established economies, broadening your portfolio's exposure. This added diversification can help manage risk and better position your investments for long-term growth.
Types of international stocks
American Depositary Receipts (ADRs) and Foreign Ordinaries
These securities represent shares of ownership in foreign companies but trade in the U.S. on listed or over-the-counter (OTC) exchanges.
Global ETFs and mutual funds
These investments hold baskets of international securities and trade in the U.S. They can provide broad exposure or focus on specific areas.
Local foreign market stocks
Some U.S. brokers, including Schwab, provide investors a way to trade a foreign company's stock directly on the exchange of its home country, in their local currency.
Schwab's perspective on international stocks
We believe investors and traders benefit from a global perspective when it comes to international stocks—one that includes portfolio allocations from both U.S. and international markets alongside global performance benchmarks. A global perspective shifts the focus from selecting stocks by country to identifying strong investment opportunities across markets. This approach also calls for measuring success differently, with a long-term, broad view to help investors stay on track toward their goals.
Benefits and drawbacks of international stocks
Benefits of international stocks
Diversification
Including international stock investing can allow you to tap into a broader range of companies that could aid in long-term growth, while helping to reduce the effects of U.S. market volatility and risk to domestic stock investments.
Potential growth
Investing internationally offers access to fast-growing economies around the globe.
Drawbacks of international stocks
Currency fluctuation
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.
Political instability
Investing in an international company's stock is investing in its home country's people and government. Political or economic events there may harm your investment.
Regulatory changes
International stock exchanges have their own rules and governance on foreign investors, and changes to their financial policies can create limitations on your access rights.
Taxation
International investments often receive different U.S. tax treatment compared to domestic investing. 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 marketplace 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%–40% 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 one-third of multi-national corporations are headquartered outside of the United States, which corresponds to global gross domestic product ratios.
Get more information on why global diversification matters.
When investing in international stocks, it is beneficial to understand the differences between developed and emerging markets to better comprehend the risks, potential, liquidity, and stability of international investment products.
- Developed Markets (DMs) 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 (EMs) are countries that 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, Thailand, India, and China are examples of some emerging markets.
It is important to note that these are not fixed definitions; different financial bodies differentiate between developed and emerging markets using varying criteria and what one entity might characterize as emerging could be considered developed by another.
Dividends paid on foreign equities are generally subject to foreign tax withholding. These taxes vary greatly depending on the country, security, and account type and can be affected by international tax treaties between countries. When foreign tax is withheld, U.S. investors may be eligible for a foreign tax credit and/or lower tax than the statutory rates applied by jurisdictions.
How do I start investing in international stocks at Schwab?
With a Schwab One® Brokerage Account, you can access domestically-traded securities from up to 30 international markets.1 Additionally, local foreign market trades in 12 of the top-traded markets1 can be placed for you by our Global Investing Services team or you can trade them on your own using a Schwab Global Account™.
Call our Global Investing Services team at 800-992-4685 from 5:30 p.m. ET Sunday to 5:30 p.m. ET Friday to learn more.
