Broadening your horizons and taking advantage of the financial world’s international presence can be a good idea, but only if you understand the potential upsides and risks. A lot of traders, whether or not knowingly, tend to focus on domestic products. This is known as home country bias and it’s something we see in all walks of life.
Why? Because we tend to have a greater sense of connection and understanding of things close to home. So, if you live in the UK, you’ll probably be more inclined to trade equities in companies based in the UK. That’s not a bad thing. In fact, there are benefits to focusing on local companies (i.e. you probably know more about them).
But there are also benefits to looking outside of wherever you call home, and look towards international markets. As well opening up your world to new opportunities, international equities can be used to create a diverse portfolio and spread your risk.
What are equities?
Equity is the amount of money that would be returned to shareholders once all debts were covered and the company stopped trading (i.e. it was liquidated). Another way to think of equity is that it’s a person’s slice of the cake. A company is the cake, and its value is divided up into slices. The size of your slice equates to how much equity you have in the company.
So, when we talk about equities, we’re talking about stock in a company. This is the reason traders tend to use the words stock, shares and equities interchangeably. Technically, when you’re trading equities, you’re buying and selling shares in a company.
It’s important to note, however, that each word does mean something slightly different. We can agree that equities trading involves buying/selling shares in companies. But, when it comes to defining stocks, shares and equities separately, it’s worth remembering these points:
Stocks is a general term that refers to ownership of multiple companies e.g. “I own stocks in Tesla, Amazon and Alphabet”.
Shares refers to the units of ownership in a single company e.g. “I own 10 shares in Tesla”.
Equity refers to the ownership stake in a company e.g. “Tesla has 1,000 shares and I own 10, which means I have 1% equity in the company”.
What are international equities?
International equities are stocks in companies that are listed on exchanges outside of the country you’re in. For example, if you’re in the UK, international equities are stocks in companies listed on exchanges such as the New York Stock Exchange (US), the Tokyo Stock Exchange (Japan), and the Shanghai Stock Exchange (China).
For clarity, if you live in the UK, equities in companies listed on the London Stock Exchange (LSE) would be classed as local. However, if you’re based in Europe or North America, stocks in companies listed on the LSE would be considered international equities.
Naturally, US equities come under the definition of international equities if you’re not in the US. However, because of the market cap of the New York Stock Exchange and Nasdaq et al., it’s often regarded as a market in its own right. So, while it’s possible to refer to US stocks as international equities, they also exist in their own subsection of the market.
The pros and cons of investing in international equities
International equities can be a great addition to your portfolio but, like all investments, they’re never guaranteed to return a profit. It doesn’t matter if you’re trading stocks, forex, ETFsor any other type of financial instrument, making money is never certain.
However, international equities give you the ability to diversify and take advantage of potentially lucrative opportunities outside of your local market. With this in mind, here are some of the potential benefits of trading international equities:
Geographic and sector diversification
International equities make it possible to spread your investments and risk across a variety of countries and sectors. This can be important when you consider the impact of economics and politics. Although every country and major trading region is linked in a general sense, there are regional differences.
For example, when one country’s economy is suffering because of political issues, others might be thriving. By investing in international equities, you’ve got the chance to take advantage of positive trading conditions in other countries and offset issues in struggling regions.
It’s the same principle with regards to sector diversification. Tech stocks are prominent in the US. So, if you’re in the UK and want more exposure to the tech industry, trading US equities could be a good move.
The point here is that some sectors will be strong while others are weak. Having equities that span a variety of industries can help mitigate the risks and create a balanced portfolio that has a chance of achieving long-term growth.
Take advantage of emerging markets
One of the main reasons to trade international equities is opportunity. Emerging markets often carry more risk than developed markets, leading to greater volatility in asset pricing. However, with this increased risk comes the opportunity for bigger returns. But the value of your investments could as a result change quickly.
Risks of international stocks
Some of the risks you need to consider with international equities are:
Additional fees and possible liquidity issues
Buying and selling stocks outside of your local region, or in exotic markets, might incur fees over and above the norm. You might also find that it’s harder to fulfil some orders because of liquidity issues. Finally, there can be currency exchange costs. Because you’re purchasing stock on a foreign exchange, there may be differences in the market value and the price you pay due to the currency conversion process and associated fees.
Lack of personal knowledge
You might find it harder to get info on a company or the market because it’s outside of your standard frames of reference. Everyone can get access to primary information, such as a company’s financial reports. However, getting access to secondary (auxiliary) information might not be as easy.
For example, if you live in the US, you’ll probably have a better understanding of the local economy simply because you’re in it. Even if you don’t look at data, you’ll understand what’s going on in the US because it is part of your daily life.
In contrast, someone in Germany probably won’t have the same local knowledge. They can read news reports, review data, and watch our webinars, but they won’t have a personal understanding of the US market. These personal insights can be extremely useful when weighing the value of a stock.
Lack of availability
Another potential drawback to trading international equities is that certain regions/markets might not be available. A lack of access to certain exchanges could be due to local laws where you live or brokerage rules.
Currency fluctuations and tax
Two final variables to consider when you’re trading international currencies are currency fluctuations and tax. If you’re based in the UK, you can buy equities from companies listed locally in GBP.
However, if you want to trade US equities, for example, you’ll have to pay in USD. That means a currency exchange needs to take place. This exchange can incur additional charges and affect the price you pay because of exchange rate fluctuations.
You also need to consider the tax implications of international equities. Financial laws are different around the world and, where one country might tax certain trades, another might not. Therefore, you need to know about the local tax laws before you enter a trade.
The risks and costs of trading international equities
Trading international equities is like any other asset. There are risks and fees for being active in the market. At Saxo, we keep the cost of trading as low as possible. We provide stocks from over 50 exchanges around the world and each one has different fees.
For example, Classic account holders will pay a minimum transaction fee of $10 when they buy stocks on US exchanges. If you decide to buy stocks from the London Stock Exchange, the fees are 0.10% of the transaction’s value, with a minimum charge of £8. Therefore, it’s worth looking through our list of available exchanges and associated fees before you trade international equities.
Then, once you’re comfortable with the charges and trading conditions, you need to accept the fact that making a profit isn’t guaranteed. You certainly can make a profit, but it’s far from certain.
