The risks of trading on an international stock exchange can impact your bottom line.
International stock exchanges give you access to many more investment options than those listed on the Australian Securities Exchange (ASX), the National Stock Exchange of Australia (NSX) and Chi-X Australia, and a portfolio of diversified investments, including international shares, protects you from loss if a stock exchange experiences a downturn.
However, international share trading can be more risky than investing in domestic markets. Risks such as foreign exchange rate risk, liquidity risk and risk from foreign governments can significantly impact your bottom line.
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Exchange rate volatility
You will need to convert Australian dollars into a foreign currency to buy shares listed on an international stock exchange.
When you convert the money back to Australian dollars, there’s a risk the exchange rate will be worse than when you purchased the foreign currency.
- When volatility can work in your favour. Volatility can also be a benefit. If the Australian dollar strengthens in the time that you hold your investment, capital gains will be higher when you sell your investment and exchange the money back to Australian dollars.
Capital gains (or losses) are only realised once a sell order is settled. Overseas stock exchanges can have fewer participants and a lower trading volume, so if you’re trading on a small international stock exchange, there’s a chance you may not be able to find a buyer for your shares. It’s particularly important to take heed of liquidity risk if you’re trading on emerging overseas markets.
Foreign policy and taxation
Just as the Australian Government’s policies can impact your bottom line on domestic investments, overseas governments can introduce policies and restrictions that can reduce your return on international investment.
Foreign policy risk includes differences in taxation laws and government instability. Overseas and domestic investments are regulated and taxed differently and capital gains from foreign investments are taxed differently to capital gains from domestic investments as well. You will need to seek the advice of a tax professional before you embark on trading on an international stock exchange.
Many companies also have operations running in politically unstable regions. Political turmoil such as a military coup or civil war can derail foreign investment. This type of risk is out of your control. Investigating foreign governments and sector regulations should be part of your due diligence before you invest in international shares.
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Foreign policy, currency and liquidity risks can significantly impact the overall performance of your international investments. Time differences are another point to consider. Important events and news can easily occur when you’re asleep, and the market can move quickly. Pay attention to the open and close of international stock exchanges if you have a vested interest in the performance of the market.