Disclaimer For Investing On Foreign Exchanges

There are instances where opportunities exist among individual stocks on non-U.S. exchanges, that do not exist on U.S. exchanges.  When we review an industry or idea, we often reference stocks available on non-U.S. exchanges, as well as stocks on U.S. exchanges.  Sometimes, we may express favorable views of stocks traded outside of the U.S.

CAVEAT EMPTOR: OUR COMMENTS ARE DIRECTED TO U.S. PERSONS, AND THERE ARE EXTRA RISKS WHEN INVESTING OUTSIDE OF U.S. MARKETS.  WE DO NOT REVIEW THOSE EXTRA RISKS IN EACH POST.  IT IS YOUR RESPONSIBILITY TO REVIEW AND UNDERSTAND THOSE EXTRA RISKS BEFORE PURCHASING ANY SECURITY ON A NON-U.S. EXCHANGE.  WE MAY SOMETIMES MENTION SOME EXTRA RISKS, BUT NEVER SUGGEST WE IDENTIFY ALL EXTRA RISKS, AND MAY WRITE ABOUT SECURITIES TRADED OUTSIDE OF THE U.S. WITHOUT MENTIONING ANY EXTRA RISK ASSOCIATED WITH INVESTING AWAY FORM U.S. EXCHANGES.  OUR POSTS ARE FOR INFORMATION ONLY, ARE NOT PERSONALIZED ADVICE, AND SHOULD NEVER BE THE SOLE BASIS OF ANY INVESTMENT DECISION.  DO YOUR OWN CORROBORATION RESEARCH AND RISK ANALYSIS, AS WELL AS SUITABILITY ANALYSIS.

Some, but not all, of the extra risks associated with investing through non-U.S. exchanges include:

  1. more institutions in the overall process – more places for things to go wrong.
  2. your U.S. broker works through one or more non-U.S. brokers in a trade.
  3. the transfer agent is local to the foreign market where you invest.
  4. the custodian bank is local to the foreign market where you invest.
  5. the currency exchange rate from U.S. dollars to the local currency for your foreign purchase may or may not be disclosed to you and may or may not be competitive.
  6. the dealer mark-up in some foreign markets may be excessive.
  7. total round trip commissions and fees will most likely exceed those for a purchase on U.S. exchanges
  8. investor protection in the event of insolvency of the local foreign institutions may not be as good as they are in the U.S.
  9. foreign investors from the local market perspective (that would be you), may not be afforded the same protections as residents or citizens of the local foreign market.
  10.  liquidity in some securities may not be adequate (a risk you may incur in the U.S. as well — and that should always be analyzed).
  11. the laws upon which you rely for your protection are substantially foreign laws for the foreign market where you invest
  12.  the foreign market where you invest may have or may introduce capital controls that could limit your ability to receive dividends or the proceeds of sale of your securities.
  13. nationalization or confiscatory fees or taxes may be a greater risk in some local markets than in the U.S.
  14. financial reporting standards may be different, and may be inadequate in some local markets
  15. availability of independent research of some stocks available on foreign exchange may be inadequate.
  16. companies are highly influenced by the aggregate performance of their local broad indexes, which may move differently than the U.S. broad index.
  17. there may also be more foreign exchange risk in general, but that is hard to measure since large companies work in multiple currencies.
For these and other reasons, we recommend (a) that purchase of individual securities on non-U.S. exchanges be limited to a small minority allocation in your portfolio, (b) that you only make purchase on non-U.S. exchanges when you cannot find a satisfactory alternative on U.S. exchanges, (c) that you avoid any purchases on non-U.S. exchanges unless you believe the position is expected to be a long-term holding, and (d) that the money used for the purchase not be money that you may need to convert to cash anytime soon.
For most investors, most of the time, an ADR or investment fund listed on U.S. exchanges is the more appropriate investment choice.

Do note, however, that ADRs traded on the Pink Sheets may present liquidity and Bid/Ask spread problems, and inability to absorb substantial trades (without disrupting the market), and may, in some instances, be inferior to purchasing shares of the company in their local market.

Investing on foreign exchanges can be useful, but be careful and highly selective as to company and country where traded.

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