If you are looking to diversify your portfolio, then you might consider taking your portfolio global.  While it may sound exotic or risky, many investors have diversified internationally, as the global marketplace offers many opportunities for making money

Many investors purchase foreign stocks because they like the idea of being able to partake in the expanding economies outside of their own country.  And since our economy has its ups and downs, foreign economies can show some exciting promise.

The problem with investing in foreign stocks is that you have to have a certain amount of confidence to find, evaluate, and make the investments.  For beginning investors, there are many foreign stocks that trade on the U.S. stock exchanges, making it a less arduous task and several mutual fund families have funds specifically designed to concentrate on foreign stocks and bonds.

Trading international securities in the US

The American Depository Receipts or ADR was created over 75 years ago by the investing community to make it easier to trade foreign stocks.  Basically, a U.S. bank will buy a large amount of shares from a foreign company.  It then repackages the shares to be sold on the American stock exchanges.  You can identify foreign stocks by the ADR after the name.

The positive aspect of ADRs is that these stocks are traded in U.S. dollars, thus you do not have to worry about currency conversion rates when you are buying and selling.  However, these rates are considered when the stock is priced and when it is sold.  The price of the stock will often follow the prices on its home exchange, and it will also fluctuate according to supply and demand.  This does not always work well since the U.S. exchange and the native exchange may not always be closely matched.  If this happens, and the original stock price is too low, the bank that bought the shares may package it so that a share of ADR is actually equivalent to two or more shares of the stock.

Benefits and disadvantages of global trading

There are several benefits to having foreign stocks in your portfolio.  Successful business happens all over the world, and globalization allows you to take part in emerging markets everywhere.  Foreign stocks offer more diversification, providing you greater security for your capital.  At the same time, if you are willing to take higher risks, you can see amazing profits in growing economies.

However, these benefits come with risks.  In addition to the risks that are inherent with any investment, there are some additional ones to consider when investing in foreign markets.  First, there is the currency exchange risk.  Some foreign countries have currencies that fluctuate faster than the dollar.  As the native currency becomes stronger or weaker, you will see fluctuations in your returns.  In addition, not all foreign countries are politically stable, and turmoil can have a negative impact on your investment.  Lastly, you have to consider inflation, since many emerging markets are unable to control rising inflation, leading to investment devastation.

Overall, foreign stocks should at least be a consideration when you are looking to diversify your portfolio.  In many cases, the professionals will recommend that they do not make up more than 10% of your total portfolio, and a smaller percentage if you prefer a more conservative investment strategy.