How do I Trade Foreign Stocks?

Stocks are traded on major exchanges around the world 24 hours per day.

Stocks are traded on major exchanges around the world 24 hours per day.

The New York Stock Exchange is one of the largest and most well known stock exchanges in the world, but it is certainly not the only stock exchange. There are major stock exchanges located in financial centers around the world, including the Johannesburg Stock Exchange in South Africa, the Bombay Stock Exchange in India, the Tokyo Stock Exchange in Japan, the Vienna Stock Exchange in Austria and dozens of others. Foreign stocks can represent good investments, and there are some simple ways for American investors to buy them including international mutual funds, exchange traded funds and American Depository Receipts.

Step 1

Determine your investment goals and temperament. Do a quick inventory of your financial health including your budget, your savings, your debts and your other investments. Consider geographic areas of the world that you have an interest in, or sectors of the world economy that you believe have the greatest potential for growth. This will give you some insight into the type of international mutual fund, exchange traded fund (ETF) or American Depository Receipt (ADR) that best suits your needs and desires.

Step 2

Do your homework. There are hundreds of ADRs, ETFs and international mutual funds available. Find those that have investment objectives that most closely mirror yours. Both mutual funds and ETFs, which are another kind of open-end investment company, are required to provide investors with a current prospectus. Request a prospectus from international mutual funds or ETFs that interest you. Read the prospectus carefully, as it contains a wealth of information including the fund's operating expenses, management fees, sales charges, investment objective and a list of the fund's current investments.

Step 3

Purchase shares of the fund you have selected. Many mutual funds, particularly no-load funds, can be purchased directly from the mutual fund company without the need to use an investment broker. Funds that have a load, or sales charge, may require you to go through a brokerage firm to place your order. International mutual funds have numerous advantages over trying to buy foreign stocks directly. They can be purchased with American dollars, they offer diversification of your investments and they provide professional management. ETFs trade on major stock exchanges and are typically purchased through an investments broker.

Step 4

Research foreign-based companies that fit your investment goals and temperament, or that are headquartered in a region of the world that is of interest to you. Researching foreign companies may be more difficult than researching American companies, particularly if they do their primary business in a language that you do not understand. You should keep in mind that many foreign countries do not have the same stringent reporting requirements as the United States. You may need to access the research department of your investments brokerage firm to get the information you need to make an informed investment decision.

Step 5

Open an account with an investment brokerage firm, if you do not already have one. Place a buy order for the ETF or American Depository Receipt equivalent of the foreign stock you wish to buy. American Depository Receipts are issued by American depository banks and represent ownership in foreign companies. They are traded on American stock exchanges, are quoted in American dollars and pay dividends in U.S. currency.

Step 6

Pay close attention to the price of your foreign investments. The American stock market can be volatile and experience extreme changes in market value. The foreign stock market can be even more volatile due to changes in the political, economic or social environment of the region where the company is located. Changes in the value of the U.S. dollar against other currencies can have a significant impact on the price of foreign stock. There may not be as ready a market for foreign stocks as there is for American companies, so you may not be able to sell when you want at the price you want.

Tip

  • Diversifying your investments, even when dealing with foreign stocks, is still safest way of investing.

Warning

  • Investing in foreign stocks involves both rewards and risks. Past performance is no guarantee of future results. You may lose some or all of your investment.

About the Author

After attending Hardin Simmons University, Kay Dean finished her formal education with the Institute of Children's Literature. Since 1995, Dean has written for such publications as "PB&J," Disney’s "Family Fun," "ParentLife," "Living With Teenagers" and Thomas Nelson’s NY Times bestselling "Resolve." An avid gardener for 25 years, her experience includes organic food gardening, ornamental plants, shrubs and trees, with a special love for roses.

Photo Credits

  • Jupiterimages/Goodshoot/Getty Images