On June 3, Mexico's IPC Index plunged more than 6% after voters surprisingly gave the leftist party control of the legislature, plus a victory in presidential balloting. The next day, India's BSE Sensex Index plunged nearly 6% after Prime Minister Narendra Modi's party appeared to fall short of a majority in the country's national elections.
Those sell-offs illustrate some of the risks of investing in foreign stocks, which require special care by U.S. investors. Learning how to invest in global stocks will help you avoid disasters.
Take Direxion CSI China Internet, for instance. It collapsed more than 98% to its low in October 2022 as tightening government oversight of tech companies and the country's economic woes contributed to an investor exodus.
There's also Yandex, often called Russia's Google. It practically disappeared from Wall Street after Russia invaded Ukraine in 2022 and the West responded with sanctions. Now, Yandex's Dutch owner is selling its remaining stake.
How To Invest: Risks Of Foreign Stocks
Foreign companies face unique risks that U.S. investors must take into account. Governments may impose aggressive regulations on businesses, especially those companies perceived to be political enemies of a particular nation. Also, economic risks abroad can impact companies in ways that don't affect U.S. firms. And foreign exchange fluctuations can cause troubles that extend beyond business operations.
U.S. investors will find that researching foreign companies often is not as easy as checking out homegrown firms. In some cases, foreign companies don't even have an English-language website. And unlike domestic publicly traded companies, foreign business are not required to file quarterly financial reports with the U.S. Securities and Exchange Commission — though most do anyway.
The SEC has forms specifically designed for foreign publicly traded companies. Most choose to file using those although many voluntarily agree to use forms for domestic companies, such as 10-Q quarterly reports. Form 20-F is the primary disclosure document for foreign firms, the SEC says.
Taiwan Semiconductor Stock A Winner
Certainly, scores of foreign stocks have become winning and reliable for those who know how to invest in them. For example, Taiwan Semiconductor Manufacturing went public on the New York Stock Exchange in October 1997 and boomed during the tech bubble of the late 1990s. The stock went through the tech bear market and began to emerge again in 2010, establishing itself as a major earnings producer and critical supplier to the tech sector.
Now the world's largest chip foundry, Taiwan Semiconductor bottomed from the 2022 bear market in November of that year and has more than tripled since then. Its market capitalization is nearing $1 trillion.
Taiwan Semiconductor trades in the U.S. via American Depositary Receipts, or ADRs. The SEC describes them as securities that represent shares of foreign companies that are held by a U.S. depositary bank outside the U.S.
How To Invest: What ADRs Represent
Each ADR represents one or more shares of a foreign stock or a fraction of a share. Although an ADR technically gives shareholders the right to obtain the foreign stock, U.S. investors usually find it more convenient to simply trade the ADR. The price of an ADR generally corresponds to the price of the foreign stock in its home market, the SEC says.
ADRs allow U.S. investors to invest in foreign companies and give those firms easier access to the U.S. capital markets. The first ADR was created in 1927 by a U.S. bank to allow domestic investors to invest in shares of a British department store, according to the SEC's website.
To research how to invest in foreign firms, the IBD Stock Screener includes the Global Leaders list. Earlier this week, it had 10 high-quality companies.
In IBD Weekly, the Global Leaders page shows the weekly and year-to-date performance of major world exchange traded funds. It also has a screen of 10 top-rated foreign companies.
