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Foreign Stocks: Should You Invest in Them?

January 25, 2019

3 min read

Not all investments are made in America.

But when it comes to putting money in the market, most people tend to think only of investing in the U.S.

That’s because so many familiar companies are here, not to mention important indexes like the S&P 500, the Dow Jones Industrial Average, and the Nasdaq. The U.S. is also the biggest economy in the world.

Still, it’s important to consider foreign investments too. Why? For one thing, it might be a good thing to invest where most people aren’t–by some estimates U.S. investors hold only 15% of their equities overseas.

Fact: Three quarters of all listed stocks are international, and they account for almost half of the total market value of all companies globally, according to research.

Why invest in foreign companies?

Here are two other reasons to consider investing in foreign stocks:

How do you buy foreign stocks?

U.S. investors can buy foreign stocks through various ETFs and mutual funds that specialize in overseas investments. In that case, you’ll be buying shares in a fund that invests in a basket of stocks.

Investors can also purchase individual stocks of foreign companies trading in the U.S.

Typically U.S. investors invest in foreign stocks through something called an American Depositary Receipt, or ADR.  It’s essentially a certificate issued by a U.S. bank that specializes in trading, which represents shares of the foreign stock, and it trades on a U.S. exchange like a regular stock.

It’s important to know that one ADR doesn’t necessarily represent one share, it typically represents a batch of shares. So, for example, if you purchased  $100 of a foreign company’s ADR, it would be worth a corresponding number of shares held by the ADR.

You don’t have to worry about the technical mechanism so much. The ADRs will appear just like a regular stock offered by your broker or trading app.

What are the fees and tax implications of foreign stocks?

If your foreign stock pays a dividend, you’ll owe taxes on it—both in the country where the company is located, and here in the U.S. To avoid double taxation, the U.S. federal government offers a tax refund for the foreign tax, but you’ll still owe taxes on the dividend amount in the U.S.

From time to time, the bank that holds the ADR may charge administrative fees for handling the foreign shares, often charged as a percentage of each share you own. You can find out more about those fees by checking the prospectus for the stock’s ADR.

Go around the world with Stash

Stash lets you buy fractional shares of stocks of some foreign companies. You can also purchase ETFs that represent different parts of the world, from Europe to Asia.

Special note: This material has been distributed for informational and educational purposes only, and is not intended as investment, legal, accounting, or tax advice. Please consult a tax professional for answers to specific questions.

 

By Jeremy Quittner
Jeremy Quittner is the senior writer for Stash.

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