The world of investing extends far beyond US borders. International stocks offer access to some of the most innovative companies, fastest-growing economies, and diversification benefits that domestic-only portfolios cannot match. Understanding how to trade global markets opens doors to opportunities that many investors overlook.
Why Trade International Stocks?
Limiting your investments to one country means missing out on roughly 40% of global market capitalization. Here are compelling reasons to go global:
- Diversification: Different economies and markets do not move in perfect sync, reducing overall portfolio volatility
- Growth opportunities: Emerging markets often grow faster than developed economies
- Sector exposure: Some industries are better represented abroad (luxury goods in Europe, technology hardware in Asia)
- Currency diversification: Holding assets in multiple currencies can hedge against dollar weakness
- Valuation opportunities: International stocks sometimes trade at lower valuations than US counterparts
Global Perspective: Companies like Nestle, Samsung, Taiwan Semiconductor, and Toyota are global leaders in their industries. By only investing in US stocks, you would miss direct ownership in these powerhouses.
Ways to Access International Markets
There are several methods to invest in foreign companies, each with different trade-offs:
1. American Depositary Receipts (ADRs)
ADRs are the easiest way to buy foreign stocks. These are certificates representing shares of foreign companies that trade on US exchanges in US dollars. Major companies like Alibaba, Toyota, and Shell have ADRs trading on NYSE and NASDAQ.
2. International ETFs and Mutual Funds
Funds like VEA (Vanguard FTSE Developed Markets), EEM (iShares MSCI Emerging Markets), and VXUS (Vanguard Total International Stock) provide instant diversification across many international stocks.
3. Direct Foreign Stock Purchases
Some brokers offer direct access to foreign exchanges, letting you buy shares on the London Stock Exchange, Tokyo Stock Exchange, or other markets directly.
4. Global Depositary Receipts (GDRs)
Similar to ADRs but typically traded on European exchanges like the London Stock Exchange.
Comparison of Access Methods
ADRs: Easy to trade, USD-denominated, limited selection (mostly large caps)
ETFs: Instant diversification, low cost, less control over individual holdings
Direct Purchase: Full access to foreign markets, currency exposure, higher complexity and fees
Major Global Stock Exchanges
Understanding the world's major exchanges helps you identify where opportunities exist:
- New York Stock Exchange (NYSE): Largest by market cap, home to many blue-chip stocks
- NASDAQ: Technology-heavy, second largest globally
- Tokyo Stock Exchange: Third largest, home to Japanese giants like Toyota and Sony
- Shanghai Stock Exchange: Gateway to Chinese domestic companies
- Hong Kong Stock Exchange: Bridge between Chinese and international markets
- Euronext: Pan-European exchange covering France, Netherlands, Belgium, Portugal
- London Stock Exchange: Major international hub with many global companies
- Frankfurt Stock Exchange: Home to German industrial leaders
Understanding Currency Risk
When you invest internationally, currency movements affect your returns. This can work for or against you:
How Currency Impacts Returns:
If you buy a Japanese stock and the yen strengthens 5% against the dollar while the stock rises 10% in yen terms, your total return in dollars is approximately 15%. But if the yen weakens 5%, your return drops to about 5%.
Currency Hedging: Some international ETFs offer currency-hedged versions (like HEDJ instead of VEA) that remove currency risk. However, hedging has costs and removes potential currency gains too.
Time Zone Considerations
Global markets operate across different time zones, creating both challenges and opportunities:
- Asian markets: Open while US investors sleep (evening to early morning US time)
- European markets: Overlap with early US trading hours
- ADRs and ETFs: Trade during regular US hours, but prices reflect overnight moves
This means international news often moves ADR prices at the US market open, creating gaps from the previous close.
Tax Implications of International Investing
Foreign investments have unique tax considerations:
- Foreign tax withholding: Many countries withhold taxes on dividends (typically 10-30%). US investors can often claim a foreign tax credit.
- Tax treaty benefits: The US has tax treaties with many countries that reduce withholding rates
- PFIC rules: Passive Foreign Investment Company rules can create complex tax situations for certain foreign funds
- Form 8938: Large foreign holdings may require additional IRS reporting
Choosing an International Broker
Not all brokers offer the same international access. Consider these factors:
- Market access: Which foreign exchanges does the broker support?
- Commission structure: International trades often cost more than domestic ones
- Currency conversion: What exchange rates and fees apply?
- Research tools: Does the broker provide international company data and analysis?
- ADR selection: How many ADRs are available for trading?
Interactive Brokers is widely considered the best option for serious international traders, offering direct access to over 150 markets worldwide. Fidelity and Charles Schwab also provide good international options.
Risks Specific to International Investing
Beyond normal stock market risks, international investing adds layers of complexity:
- Political risk: Government actions can dramatically impact investments (nationalization, sanctions, capital controls)
- Regulatory differences: Accounting standards, disclosure requirements, and investor protections vary by country
- Liquidity risk: Some foreign stocks trade with lower volume, making it harder to buy or sell
- Information gaps: Less analyst coverage and English-language information for many foreign companies
- Settlement differences: Trade settlement times and procedures vary by market
Building a Global Portfolio Strategy
A thoughtful approach to international allocation considers several factors:
Determine Your Allocation:
Many financial advisors suggest 20-40% international allocation for US investors. Your specific allocation depends on your risk tolerance, time horizon, and investment goals.
Balance Developed vs. Emerging Markets:
Developed markets (Europe, Japan, Australia) offer stability and established companies. Emerging markets (China, India, Brazil) offer higher growth potential with higher risk.
Consider a Core-Satellite Approach:
Use broad international ETFs as your core holding, then add individual ADRs or country-specific funds for targeted exposure to specific opportunities.
Track Your Global Portfolio
Pro Trader Dashboard helps you track international stocks, ADRs, and ETFs alongside your domestic holdings. Monitor performance across all your global investments in one place.
Summary
Trading international stocks opens your portfolio to global opportunities, diversification benefits, and access to industry leaders worldwide. Whether through ADRs, ETFs, or direct foreign purchases, investors today have unprecedented access to global markets. Understanding the unique considerations of international investing - from currency risk to tax implications - helps you build a truly diversified portfolio that captures growth wherever it occurs.
Ready to explore specific markets? Learn about ADRs and how they work or read our guide to emerging markets investing.