Stock Trading Success

Home - Table of Contents >>

What's Foreign Depends On Where You Stand

The New York Stock Exchange is not the oldest operating securities market. Though measured by total market capitalization, it's among the largest at $12 trillion - yes that's twelve trillion dollars. The Paris bourse goes back to 1724 and the Deutsche Boerse is even older: founded in 1585.

There is a new stock exchange in Budapest (1993) and old ones in Brazil (1890) and Australia (1837), and larger ones in Hong Kong - which trades six times the volume of the NYSE (7 billion shares per day).

Apart from some interesting historical info, that's to remind everyone that, though the U.S. market is large, it is not the only game in town - even for U.S. investors. And the latter are far from the only traders on Earth, though they sometimes think that way.

How to go about playing it?

Even differentiating today what is a foreign company is not so straight forward. Honda makes automobiles in the U.S. and both Unilever and Shell are Dutch-Anglo. Dozens of companies headquartered in Japan list on the NYSE and multi-nationals like McDonald's list on several exchanges.

When listing in the U.S., non-U.S. based companies typically are traded in the form of ADR (American Depository Receipts). Technical details aside, they trade just like ordinary shares and prices are listed in the usual way.

A call to a broker is generally required for a U.S. investor to trade a non-U.S. company stock, and a larger commission is charged. 1% is normal. On a $5,000 trade - often the minimum - that's $50, hefty in this day of online trading accounts. But other than that, the transaction is carried out, from the investors point of view just as normal business.

The research requirement to avoid losing money at more than the normal rate is considerably higher, however. Keeping tabs on the activity of foreign companies means understanding the local culture and business environment. It entails tracking many more laws that can impact earnings and knowing the rules that govern trades in different countries.

Fortunately, with the growth of consolidated exchanges like Euronext - formed in 2000 by merging the Paris, Amsterdam, Lisbon and Brussels exchanges - has made that significantly easier. That trend is likely to continue.

Risk, too, is higher. Trading outside one's home country means having to pay attention not only to all the usual factors, but exchange rates as well. And currency exchange is the largest and most active market in the world. For several years, the U.S. dollar was king of currencies but lately it's been taking a beating.

That isn't necessarily bad even for U.S. investors, since risk can be minimized and profits maximized in two ways. One way is to invest in offsetting currencies and equities - as one country's currency rises, one can buy more of their shares with that country's currency. The other, better, way for the average investor is to look to ETFs (Exchange Traded Funds) that focus on foreign securities and let those issues be handled by professionals.

Whatever your plan, having a healthy respect for research and a commitment to a well-thought out trading strategy is required for anyone interested in capitalizing on the growth of businesses far from home. Unless you just enjoy losing money.