Investing in stocks issued by companies operating in your country of residence provides numerous advantages. These include avoidance of exchange rate risk, ease of research and even physical access to the issuing company. In particular, novice investors should primarily concentrate on domestic shares. An international stock portfolio is best left to investors who have the time and experience to study laws, regulations and financial statements in several countries.
Shares of stocks issued by companies headquartered in your country almost always trade in a local stock exchange, and the stock price will be quoted in the local currency. Therefore, you will not face the risk of collecting your sales proceeds in another currency and then being forced to convert those proceeds to your local currency at an unfavorable rate. Assume one euro buys one U.S. dollar on January 1. You convert $1,000 into 1,000 euros and buy BMW stock. The stock goes up and you sell your shares for 1,100 euros but now need 1,15 euros to buy onedollar. Therefore, your sales proceeds are worth $956, and you have lost money even though the stock went up. If the stock been trading in dollars, a higher stock price would always mean more money in your pocket.
Ease of Research
It is easier to understand the business activities and strategies of a domestic company. For starters, interviews with top managers, financial analyst reports about the corporation and stock predictions will be in your own language. In many cases, you can see the product manufactured by the company and talk to suppliers or wholesalers. With stocks issued by corporations located in other countries, these are far harder to do. Even accessing the company's investor relations department and finding someone who can communicate with you in your mother tongue can be an issue. If you own substantial stock in the company and wish to attend the annual shareholder meeting in person, it's much easier if you only have to take a domestic trip, as opposed traveling across borders.
Laws and Regulations
When you buy international stocks, you must familiarize yourself with the securities regulations in another country. Your rights and obligations as a shareholder of a stock purchased overseas are subject to the laws of the nation where the stock is trading. The company whose stock you own will also be subject to the rules and regulations in its homeland. While you may be aware of changes in, say, the environmental regulations in your own country, it is far harder to follow all relevant news in a different nation. You may suddenly find out that the company whose stock you own must invest millions in a purification plant as a result of changes to the local laws, for example.
In an increasingly globalized economy, the definition of a domestic stock is also changing. Companies that are headquartered in your country, with stocks that trade in a local exchange, for example, may be doing most of their work in other countries. Such companies may even have issued stock in several stock markets around the world. Understanding the business prospects of such multinationals will always pose a greater challenge than grasping the ins and outs of a purely local company. However, you can at least stick to the company's stock issued in your local stock exchange to avoid having to deal with stock market rules in another nation.
Hunkar Ozyasar is the former high-yield bond strategist for Deutsche Bank. He has been quoted in publications including "Financial Times" and the "Wall Street Journal." His book, "When Time Management Fails," is published in 12 countries while Ozyasar’s finance articles are featured on Nikkei, Japan’s premier financial news service. He holds a Master of Business Administration from Kellogg Graduate School.