Foreign stocks are stocks that are not traded on a stock exchange in the originating country. You can trade them on exchanges in other countries, such as the London Stock Exchange or the Tokyo Stock Exchange. Many large multinational companies have shares traders can trade on multiple exchanges worldwide.
There are several reasons why an investor might want to purchase foreign stocks. For example, they may believe that a particular company or sector is undervalued by the market and therefore offers good potential for capital appreciation. Or they may wish to diversify their portfolio to reduce risk.
Before taking part in share trading, it is vital to research the company and understand the risks involved thoroughly. For example, political and economic instability in some countries can make investing in their stock markets a risky proposition. Also, language barriers and differing regulations can make it challenging to obtain accurate and timely information about a company.
However, with careful research and a clear understanding of the risks involved, investing in foreign stocks can be a rewarding experience.
So, should you buy US stocks in Australia? Let’s look at some of why you might want to consider doing so.
Access to a wide range of companies
The US stock market is the largest globally, with a total market capitalisation of over $30 trillion, compared to around $2 trillion for the Australian stock market. So, by investing in US stocks, you will have access to a much more comprehensive range of companies than if you only invested in Australian stocks.
It is essential because it gives you more opportunities to find companies undervalued by the market and therefore offers good potential for capital growth. It also allows you to diversify your portfolio more effectively, which can help to reduce risk.
The US stock market is more liquid
The liquidity of a market refers to how easy it is to buy and sell shares. The US stock market is much more liquid than the Australian stock market, so buying and selling shares is more straightforward without worrying about the price moving against you.
It is essential because it means that you can take advantage of opportunities without worrying about getting stuck in a position. It also means that you can exit a position quickly if you need to.
The US stock market has outperformed the Australian stock market over the long term. For example, over the last ten years, the S&P 500 index, which tracks the performance of large US companies, has returned an average of 13.6% per year, compared to an average return of just 5.7% per year for the Australian market.
A stronger currency
The US dollar is one of the strongest currencies in the world, so when you invest in US stocks, your returns are more likely to be higher when converted back into Australian dollars.
It is essential to get more bang for your buck when investing in US stocks. It also means that it is improbable that you will lose money on the currency conversion if you need to sell your shares instantly.
The tax treatment of foreign investments can vary depending on their country. You may be accepted for Australia’s foreign income tax offset if you invest in foreign countries, including the US. It can reduce the tax you have to pay on your investment income.
Many Australians are familiar with the US stock market because it is often featured in the media, so you may already know how it works and what companies are listed on it.
This familiarity can make US stocks less daunting than investing in stocks from other countries. It can also be advantageous when making investment decisions.
Diversification is vital for any investor because it helps to reduce risk. By investing in US stocks, you can add another level of diversification to your portfolio. The US stock market’s performance is often uncorrelated with the performance of the Australian stock market, meaning that when one market is going down, the other may be going up.