Investing in foreign markets offers new avenues and opportunities for investors to diversify their portfolio. Investors are attracted to foreign markets, as they offer a chance to participate in growing economies. Foreign market investing today is directed at the BRIC countries: Brazil, Russia, China and India, as well as developed markets outside of the U.S. such as European markets. In addition to BRIC, there are other emerging countries that offer good investment opportunities for investors. One of the easiest ways to invest in these countries is to identify either mutual funds or ETFs (Exchange-Traded Funds) specializing in those countries specifically.

Some of the benefits of international investing include:

• a well-diversified basket of international stocks can typically reduce volatility either in the home country or in the foreign markets
• more opportunities for an investor to invest in companies that are not available in the home country—for example, US investors have little opportunities to invest in coffee, tea, or rubber, but they can take advantage of it in foreign markets
• international investing can greatly help an investor when there is a devaluation of one's own currency

As with any investments, international investing also carries risks of market conditions, but there are added risks:

• Political: changes to government and political systems can adversely affect a country’s markets.
• Currency: fluctuations in the exchange rate can affect investment returns, either positively or negatively.
• Access to information: accurate information about foreign companies might be more difficult to obtain. Different countries will have different rules and regulations for reporting and accounting systems and this could impact an investor’s holdings.

A good way to invest overseas is through a reputable international mutual fund.

Investing in foreign markets is not without risks, and an investor should be fully aware of what goes into it. Here are the top 5 things to keep in mind before investing in foreign markets:

 1  Exchange Rate

While investing in foreign markets, it is essential to understand and follow the exchange rate between the market currency and the U.S. dollar. A big change in the exchange rate can have a positive or negative impact on the performance of your investments, and on your portfolio as a whole. The stronger the dollar, the less a US investor will earn over time in a foreign market.

 2   American Depository Receipts

American Depositary Receipts (ADRs) are the easiest way for an investor to purchase shares of foreign companies. The ADRs are issued by banks in the U.S. and can be bought and sold on the American stock exchange like any other stocks. An ADR is a negotiable certificate representing a specified number of shares of foreign stock that is traded on a U.S. exchange. Through the use of ADRs, an investor can buy, sell, and receive all payments in U.S. dollars and reduce regulatory problems.

 3  Direct Purchases of Foreign Stocks

Foreign stocks can also be purchased through foreign exchanges in the foreign currency. While direct purchases typically have lower transaction costs, the costs of changing currencies can offset this advantage. Direct purchases are best when the investor wants to buys stocks of a specific foreign company. The company’s Web sites typically provide the information of the exchange the company works with.

 4  Mutual Funds

Many U.S. investment firms offer global mutual funds that are diversified across many countries. These mutual funds are available in various forms. There are funds with concentrations in a particular market (German Stock Exchange), region (South America or Europe), or specific industries (high tech or energy). These funds offer a great means for an investor to invest internationally, as these mutual funds are listed on the New York Stock exchange and can easily be purchased.

 5  Tax Consequences

An investor needs to be aware of the tax consequences when investing in foreign markets. There may be specific taxes imposed on certain foreign investments. It is a good idea to consult a tax professional to fully understand the tax issues involved in investing internationally.

Additional Resources:

- The World Federation of Exchanges: http://www.world-exchanges.org

- The Bureau of Economic Analysis: http://www.bea.gov

- The Federal Reserve: http://www.federalreserve.gov