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Indians can gain impressive returns by investing in international stocks, including the U.S. stock market. But before making your first investment, it is essential to understand the advantages and risks of international investing. Let’s start with a definition.
What Is International Investing?
International investing is an investment strategy that involves selecting global investment instruments to geographically diversify your portfolio. This allows you to invest in foreign economies and capitalize on their potential for growth.
Because global investment strategies often encourage diversifying portfolios across multiple foreign markets, international investing frequently sees greater rewards with fewer portfolio risks than domestic investing, where investors are limited to a single country.
Why Invest Internationally? 5 Key Advantages
Global investing can be a tricky endeavor, as you will need to consider several factors unique to international investing, such as currency rates and foreign interest rates. The potential gains from global investing, however, make it well worth the learning curve.
Below are five important benefits of investing in international stock markets:
1. Greater Diversification
Diversification is the greatest advantage of investing internationally. While diversification in domestic investments allows you to capitalize on multiple industries, diversification in international investments enables you to capitalize on entire economies.
Some industries are not as robust in India as in the United States and other countries. For example, the tech industry in the United States has made major contributions to the U.S. stock market in recent years—a trend that is expected to continue. International investing offers easy access to those developed markets so you can capitalize on their growth.
2. International Growth
The United States maintains the largest GDP among any country in the world. The country’s GDP continues to grow, increasing by as much as 5.2% in 2021.
While India’s GDP remains strong, and grew significantly in 2021, investing in U.S. stocks can help investors in India grow their portfolios even more.
3. Direct Investments in Profitable Companies
Many of the most profitable companies in the world, such as Microsoft, Apple, and Alphabet (Google), are based out of the United States. By investing in the U.S. stock market, you can invest directly in those companies to benefit from their returns.
4. Stronger Currencies
Currencies frequently fluctuate in value, with some currencies varying more than others. The U.S. dollar, for example, has gradually appreciated despite the country’s growing inflation rates.
Thanks to the strong U.S. dollar, your investments in the U.S. stock market have a better chance of remaining secure.
5. Build Local Wealth
Investing in a foreign exchange market allows you to build wealth in that currency. If you plan to immigrate, enroll in a foreign university, or make any large purchase from that country, you will have liquid assets in the national currency. This will also allow you to avoid the exchange rate fees you would likely incur were you to make those same payments in rupees.
Risks of International Investing
Similar to any investment strategy, international investing carries some risk. Consider these five risk factors before investing in international markets.
1. Volatile Foreign Currencies
Investing internationally can put you at the mercy of the exchange rates, particularly as inflation rates continue to rise around the world. If you invest in a country’s stock market and the local currency drops in value, you could lose much of your initial investment. One way to minimize this risk is to limit your investments to countries with a relatively consistent exchange rate and currency value.
2. Political Influences
Political events (such as major elections), wars, and many other variables can affect a country’s stock market and currency value, hurting your investment.
Before investing in a new country or region, study the current geopolitical environment and familiarize yourself with the region’s history. If an election is approaching or regional tensions are escalating, it may not be an ideal time to invest.
3. High Transaction Costs
A major downside to investing in international markets is the associated transaction fees. This can cause international investments to be more expensive than domestic investments. However, partnering with the right investment tool can help you avoid transaction fees, making your international investments just as equitable as your domestic ones.
4. Liquidity Risks
Investing in international markets risks illiquidity. You may not be able to sell or buy investments quickly without risking losses caused by political instability or economic downturns. This is because you may be limited in how many investment assets you can buy or sell during these times.
Stocks with lower share volume are less liquid. Thus, the more shares a company has, the more likely your stock’s liquidity will remain steady.
5. Different Market Operations
Finally, another challenge with international investments is that you may not know how to navigate the stock market. It may function slightly differently than the Indian domestic stock market, which could lead you to make errors in your investments due to simple misunderstandings. Those misunderstandings can quickly add up to significant losses.
Working with an investment program, such as Vested Finance, offers you a familiar interface so you know exactly how your investments are performing.
Get Help with Your Investments
Although international investing can be a profitable endeavor, it can be a complicated endeavor, too. Invest wisely and evaluate the risks carefully. Always remain cautious and seek help from an expert when you need it.
Vested Finance offers its users a way to invest in the U.S. stock market while living in India. Our service offers fractional share investing at no minimum balance, so you can invest any amount of money to grow your assets.
