Now more than ever, investors have access to all different types of markets to trade and invest in. Due to the rise of the computer and the internet, the average investor has unparalleled access to stock markets around the world. However, this also comes with risks. Not all investors know whether to invest in domestic stocks, foreign stocks, or both. It’s important to the advantages and disadvantages of both.
DOMESTIC MARKETS
The main advantage of investing in domestic markets is the investors recognizes the companies and can get more information on them than he or she could on foreign companies. This means the investor can get a feel for how the companies are doing better here. The market they operate in is easier to understand and more natural to the investor. They also operate under strict regulations they have to follow.
The main disadvantage of domestic stocks is the investor is just invested in one country. As the recent decline in stock prices has shown, keeping all of your stocks in one country can be financially painful. Because all of the stocks are tied to one country, they rise and fall with the economic situation of the country.
Domestic markets would be a better type of investment for a retirement account. Because of the added stability, there is less of a chance the stocks could fall and hurt the retirement account. They also usually pay a more-stabile dividend. However, domestic stocks are also used for short-term trading because it is easier to get access to the stock sooner.
Due to the recent economic downturn in America, it seems the best stocks for the investors are the non-cyclical stocks. These are companies that sell things Americans need every day and they aren’t going to stop buying them. Examples of these companies include Proctor & Gamble, Pepsi Co., and Johnson & Johnson. These companies have shown they survive economic downturns well.
FOREIGN MARKETS
Foreign markets allow the individual investor to invest in companies overseas. The main plus with these stocks is the usually have higher returns than domestic stocks. This is very attractive to everyone because everyone wants to make more money. These stocks are also allow protection incase an investor’s own country suffers a recession.
The main problem with foreign stocks is they are riskier than many domestic stocks. This is because foreign investors don’t usually get the same information as domestic investors just because they live in different countries. Also, the risks increase with less-developed countries or with less-democratic countries. It is riskier to invest in Botswana than Germany. Because of this, an investor could lose a lot or all of his or her money.
Foreign stocks would be good for both short-term trading and retirement accounts. They just need to be watched more than domestic stocks. They can add more profits to retirement accounts because of the increase rate of return. They can also let the short-term trader benefit if he understands the country more than other people.
Even though most foreign stocks went through the roof the past couple of years, there are still some good investments out there. The recent “recession” in the United States shows why investors need to be in foreign stocks. It gives them some protection against a downturn in the US stocks markets.
Like every investment, the one who understands what he or she is buying will usually come out ahead. If the investor is careful, he can lower most of the risks involved with investing. Just remember that all the risks can never be eliminated, no matter where money is invested.