What Does Denominated Stock Mean?

When you buy U.S. goods, they are expressed in terms of dollars. Because of the size of the U.S. economy and the widespread use of dollars, some items are expressed in U.S. dollars even in other countries. For example, oil is bought and sold in dollars throughout much of the world, even though many of the countries buying and selling oil have their own currencies.

Buying a stock listed on an exchange outside your home country will likely mean you have purchased a foreign currency-denominated stock. For example, if you are a U.S. investor and buy a stock listed on the Australian Securities Exchange, it must be purchased in Australian dollars. A stock listed on a Canadian stock exchange is denominated and quoted in Canadian dollars.

Currencies are subject to fluctuating exchange rates. These are usually determined by market supply and demand but occasionally are fixed at a certain price relative to another currency. Fluctuating exchange rates can increase or decrease the returns on a foreign currency-denominated holding. Investors must consider whether the stock price will rise or fall and whether the foreign currency will go up or down relative to their home country's currency.

Assuming the stock price stays the same, if the foreign currency rises, this will increase the investment return. This is because when the stock is sold and converted back into the home currency, more home currency can be purchased, since the foreign currency increased in value. If the foreign currency declines, the return will decrease.

Buying stocks denominated in other currencies is considered a form of diversification. When you hold assets in multiple currencies, if one currency falls relative to the others, the exchange rate losses are partially offset by the corresponding rise in the other currencies. Purchasing foreign currency denominated stocks can be done through a broker and will require the simultaneous buying of the currency in which the stock is denominated.