Foreign securities are investments in companies or other entities outside the investor’s home country. They are traded on foreign exchanges, and their prices can be affected by various factors, including the political and economic conditions of the issuer’s home country.
A foreign security is a type of security not listed on a Singapore stock exchange. They are traded in over-the-counter (OTC) markets and can be bought and sold through a broker.
Benefits of investing in foreign securities
The benefits of foreign securities are manifold for investors in Singapore.
A more comprehensive range of investment opportunities
Firstly, investors can access a broader range of investment opportunities and asset classes that may not be available locally by investing in foreign securities. This diversification can help to reduce overall portfolio risk and volatility.
Higher potential returns
Secondly, foreign securities can offer higher potential returns than domestic investments due to the higher levels of risk associated with them. However, it is essential to note that higher returns also come with higher volatility. Hence, investors need to be aware of the risks involved before making any decisions.
Exposure to new markets
Thirdly, investing in foreign securities can expose investors to new markets and economies to which they may not have access otherwise. This can provide valuable insights into how macroeconomic, political and social factors affect returns. Furthermore, this knowledge can help investors make better-informed investment decisions about their portfolios.
Reasons investors might choose to invest in foreign securities
There are several reasons investors might decide to invest in foreign securities. One is that they may believe that the company or entity is undervalued relative to its peers in its home country.
Another reason could be that the investor believes that the company or entity will benefit from strong growth prospects in its home country while still offering value compared to similar investments in other countries.
By doing their homework and understanding the factors that can affect prices, investors can potentially earn healthy returns by investing in companies with solid fundamentals and growth prospects, regardless of where they are based.
Types of foreign securities
There are two types of foreign securities:
ADRs (American Depositary Receipts)
ADRs are receipts that represent ownership of shares in a foreign company deposited with a bank in the United States. They trade on U.S. exchanges and can be bought and sold just like regular stocks.
GDRs (Global Depositary Receipts)
GDRs are similar to ADRs, but they represent ownership of shares in a foreign company deposited with a bank in a foreign country. They trade on foreign exchanges and can be bought and sold just like regular stocks.
Risks associated with investing in foreign securities
Investors should be aware that risks are associated with investing in foreign securities. Political and economic conditions in the issuer’s home country can significantly impact the price of the security. In addition, investors may not be able to trade or sell their securities as quickly as they could if the investment were made in a company or entity located in their own country.
Foreign securities are generally traded through different exchanges from Singapore’s SGX, so there could be additional risks that investors need to consider if they have no experience investing internationally before making a decision. However, foreign securities can be a valuable addition for more experienced investors looking at increasing portfolio diversification and global exposure.
There are relatively higher fees involved when trading foreign securities than local investments. These include brokerage fees and the bid-ask spread, which can eat into returns. Careful consideration should be given to these factors before deciding whether to invest in foreign securities or not.
Investors should always do their homework before investing in foreign securities, as they may not be as well-known as domestic securities and may be more volatile. We recommend using a reputable online broker from the Saxo bank group if you are a new investor.