The Australian Stock Exchange (ASX) represents less than two per cent of the global market and is dominated by a few sectors, including financials, mining and healthcare. While it provides access to many great companies, including household names and even a few major global businesses, it goes without saying that many more investment opportunities lie abroad.
If you are looking to invest in major tech stocks like Facebook and Google or big entertainment businesses like Disney or Netflix, you’ll have to look to the major US exchanges. If you want greater access to the fast growing Chinese market, meanwhile, you might want to look to Hong Kong and if you’re looking to invest in major global banks the London Stock Exchange could be a good option.
Ultimately, having the option to invest in overseas-listed companies opens up more opportunities and allows for greater diversification. An investor focused only on the ASX can miss out on many investment opportunities, and is unable to invest in a major automaker and has relatively limited (though growing) opportunities in the tech space.
Investing or trading internationally allows for access to different sectors and different markets. This can be important from a risk management point of view. Devoting some of your portfolio to internationally listed stocks will mean you are less exposed to a downturn in Australian stocks (though global markets are increasingly intertwined).
The Australian dollar is typically treated as a barometer of global growth – it tends to do well when economies are growing and investor confidence is high and fall when things go bad. This may benefit an investor in US stocks in the event of a global downturn. While their portfolio may fall in value in US dollar terms, a drop in the Australian dollar could offset some of the losses.
This works both ways of course. Currency fluctuations can amplify gains or exacerbate losses, depending on the situation. There are numerous other possible scenarios as well – the Australian dollar could rise in tandem with your US portfolio, effectively wiping out some of the gains, or it could fall while your portfolio stayed virtually flat, leading to a gain even though your stocks are not worth more in US dollar terms.
Having shares listed on international exchanges can also be a great way for traders to maximise their trading hours. This is especially useful for a trader who works a day job – they can come home after work and trade the London Stock Exchange or wake up early and trade US stocks.
Whatever asset class or jurisdiction you are investing in, the key is always to do your research. Once you’ve decided to invest in a particular market, say the US for example, it’s important to take the time to understand the dynamics at play. This could include accounting rules, the economic growth outlook, domestic and international exposures and so on.
Naturally, you need to do this on a stock-by-stock basis as well. The good news is quality information has never been more accessible – traders and investors using CMC’s platform, for instance, have easy access to Morningstar research.
While China has two of the largest exchanges by market cap in the Shanghai and Shenzhen exchanges, there are strict limitations on foreign investment into China, which makes these markets almost untenable for the average retail investor.
International shares can be a great addition to your trading strategy for a variety of reasons. By looking to the international market, you are able to start trading shares in the world’s best performing and emerging companies.
Furthermore, by diversifying your portfolio outside your local market, you can spread the risk of being negatively affected by fluctuations in individual markets. Factoring in the time zone and currency of where you are looking to trade will also help minimise any risks and may even prove advantageous.
To find out more or get started, visit our international shares page. Or if you want are intrigued about the American market, here are some things you should know about trading US stocks.
