1-10 Foreign Currency and Foreign Stocks
You just got some insider information – Nintendo is about to announce a new Zelda game, coming out on their new console. Gamers are getting pumped up, this is a sure-fire hit. As a savvy investor, you think now might be a good time to invest in Nintendo!
But wait, Nintendo is not listed on major US exchanges – it is a Japanese company, available in Japan. Before you invest, you will need to learn about investing in Foreign Currencies and Foreign Stocks.
Foreign Exchange (FX)
Currencies are traded between countries on the Foreign Exchange, or FX market. If you have ever travelled to another country, you might be familiar with trading in your dollars for Euros, or some other currency.
However, the value of every currency changes every day. A Big Mac might cost $5.50 in New York, but £3.29 in London. Tomorrow the price of beef might go up in England (causing the London Big Mac to cost £3.50) but stay the same in New York. The price to buy one US dollar with British Pounds, and visa-versa, is called the Foreign Exchange rate – and like all other investments, is determined by supply and demand.
Investors holding US dollars might trade them for British Pounds or Japanese Yen, if they think that the FX rate will change in the future. FX rates are extremely sensitive to broad economic conditions – tiny political changes can have big impacts on the FX rates very quickly. FX trading on its own can be very risky, but generally follows the same dynamics as commodity trading.
Nintendo stock is a foreign stock – which means in addition to all the factors you need to think about with a regular stock get amplified due to the Foreign Exchange rate. It could be that you were right – the new Zelda game was a smash hit, and Nintendo’s stock jumps 10% this year. But due to other economic factors, the Yen fell 15% against the dollar – so when you cash out your earnings and bring that money back to your bank account, you actually lost money!
Thankfully, big currency swings like that between big countries is rare, and many financial planners encourage investors to consider foreign stocks as part of a diversified portfolio.
Buying Foreign Stocks
There are a few ways to buy foreign stocks on your own. Keeping with our Nintendo example, if you try a symbol lookup in a regular US brokerage account, you will find the symbol NTDOY. While Nintendo technically is not listed in US exchanges, some investors who own Nintendo stock bought in Japan sell them “Over the Counter”, or outside the regular exchanges.
Otherwise some larger brokerages allow investors to directly invest in foreign markets – for example, Interactive Brokers connects its users to 135 financial markets in 33 different countries and is open to users from around the world – unlike many big U.S.-based brokerages, you don’t have to be a U.S. citizen to sign up!