Investing in foreign stocks can be an excellent way to diversify your investment portfolio and potentially earn higher returns. Here are some tips for beginners on how to invest in foreign stocks:
- Do your research: Before investing in any foreign stock, it’s important to do your research. Look into the company’s financial health, history, and management. Also, research the economic and political climate of the country where the company is based, as these factors can affect its performance.
- Consider investing in international mutual funds or exchange-traded funds (ETFs): These funds provide exposure to a diversified portfolio of international stocks, which can be an excellent way for beginners to gain exposure to foreign markets without having to research and purchase individual stocks.
- Open an international brokerage account: If you want to invest in individual foreign stocks, you’ll need to open an international brokerage account. This type of account will allow you to trade on international stock exchanges and may also provide access to research and tools to help you make informed investment decisions.
- Be mindful of currency exchange rates: When investing in foreign stocks, you’ll also need to consider currency exchange rates. Changes in exchange rates can have a significant impact on your returns, so it’s important to be aware of this and factor it into your investment decisions.
- Start small and diversify: As with any type of investing, it’s important to start small and diversify your investments. Don’t put all your money into one foreign stock or market, and be prepared to ride out fluctuations in the market over the long term.
Overall, investing in foreign stocks can be a great way to diversify your portfolio and potentially earn higher returns. However, it’s important to do your research, consider investing in mutual funds or ETFs, open an international brokerage account, be mindful of currency exchange rates, and diversify your investments to minimize risk.
Things to know before investing in Foreign Equities
India’s stock market capitalization is around Rs 285 lakh crore (US$ 3.50 trillion) and the combined market capitalization of the top ten companies alone is Rs 77.90 lakh crore (Data: BSE India). It is noteworthy that more than five thousand companies are listed in the Indian stock market.
The Indian stock market also suffered due to the US economic collapse in 2008. This fall was also due to the massive selling of shares by foreign investors. But even as the Indian stock market tumbled in 2020, the contribution of local investors was seen as a key event in the subsequent recovery.
The Indian stock market has not experienced a significant decline despite foreign investments largely exiting over the past few quarters. This is mainly due to increasing local investments, including stock investment advertisements by Fintech companies, continuous investment in mutual funds, significant stock awareness after the COVID-19 pandemic, and government savings returning to the stock market. These factors have provided strong support for the Indian stock market.
Fintech companies’ stock investment recommendations and promotions have attracted new local investors to the Indian stock market. Additionally, many stock brokers now offer direct investment in foreign stock markets, and third-party fintech apps also allow for buying foreign shares, despite not having direct operations in the stock market.
Through this, Indian local investors can also buy shares of famous foreign companies like Google, Apple, Samsung, Microsoft, Amazon etc. After globalization, our country’s economy has grown tremendously. Nowadays, making financial investments has also become easier with the technological and internet revolution. Today it is so easy to sit in some village and buy shares of ‘Tesla’ which is traded in America.
While it’s easy for the small percentage of people who invest in the Indian stock market to buy foreign stocks, it’s not necessarily easy to make a profit. Only a few thousand people who invest in the Indian stock market actually make a profit. Many investors in India don’t understand the difference between saving and investing, so it can be challenging to understand foreign stocks that are recommended for promotional purposes. In reality, it’s not easy to make a profit in the stock market.
Understanding listed companies can be challenging for direct stock investors in the Indian stock market. We need training to comprehend a company’s business background, financial statements, and management. It’s difficult to predict how stocks trading below 100 rupees or above 1000 rupees will move in the market. It’s also uncertain if a sector will perform well for the next 50 years. All stock markets have a history of famous brands going public. To mitigate risk, financial advisors and economists recommend investing for the long term through mutual funds. Mutual funds have fund managers who research stock companies and make investments on behalf of investors.
Let’s focus on the main points to consider when investing in foreign stocks directly through a platform.
- What is the reliability of buying foreign shares through third party apps, does the company operate under the regulatory authority or do they recommend it on the basis of associates with some other company?
- Today, most of the platforms say that there are no fees for opening a demat account and buying shares, but it is important to be aware of the documents and fees required to open an account to invest in foreign shares.
- We need to know if there is any charge on the later sale of the purchased foreign shares and whether we can hold them for a long period of time.
- What is the monthly or annual maintenance fee to receive share portfolio statement by email?
- After selling the shares, if we want to credit our bank account, how much are the withdrawal charges?
- If there is any problem with the foreign company shares that we have invested in (the company), will they inform us about it, how will we know if the stock is withdrawn from the market for any reason?
- Those of us who buy foreign shares should know how the income tax law of the country is and whether there are any positive aspects for us.
- If any dividend is paid on the invested shares, in which bank account will it be credited and how is the tax levied?
- Are there websites to easily know the business and financial reports of foreign company stocks, do I have to pay any fee to know them (Research reports)?
In general, the taxation of stock investment in the United States is higher than in our country. While here the period for long term capital gains tax is more than one year, in US it is more than two years. While the tax for long-term capital gains is 10% here (profits up to Rs 1 lakh are tax-free), in the US there is no tax exemption at 20%. There is also an exit fee to transfer the money to the bank account after selling the equity investment.
Direct Equity Investment is high risk. However, if you research stock companies properly and invest in them for the long term, you can get good returns. At the same time there is no guarantee that global brands and all penny stocks will give good returns.
Lately, some fintech platforms have been seeing promotions like “Most Wanted Stocks, Stock Companies Under Rs 10, Top Selling Mutual Fund Schemes on their Platforms, Schemes with Highest Earnings in a Single Week”. We should be careful and understand the nature of risk involved in investing following these recommendations. Best-selling or most sought-after stocks and schemes are like festive offers. We must remember that investing our hard earned money through such recommendations is of no use.
Only 55 percent of the US population is involved in the stock market. This is 33 percent in the United Kingdom and 13 percent in China. Foreign companies are investing here considering the future development of India. Developed countries like Japan and USA are investing heavily here to improve the country’s infrastructure.
As such, most of our stock investment opportunities are right around the corner. It is possible because the developed countries invest here and earn, and invest in our company shares to fill the space for us.
Note: I am fully invested locally and making returns. My investment contribution to the country’s economy is immense. So if you say that you consider foreign stocks as an opportunity, feel free to invest in foreign stocks (with the understanding of fees and taxes).
Most of the foreign stock investment schemes (Mutual Funds) are available to us today through mutual fund companies.