Starting this month, I will try to show my monthly portfolio in this blog.
Whenever I buy or sell a stock, I will try to justify the cause. My investing mantra lies between an investor and a trader. Therefore, you'll see quick transactions on some stocks while others may be there for years. So here's my portfolio for this month!
**Edit: Chart removed because I set it to update with latest information -- not accurate info
Friday 17 April 2015
Tuesday 14 April 2015
Risk of Buying Foreign Stock
It's has been a while since I've updated this blog. Being on study exchange do take up my a whole load of my time. In this post, I want to talk about the risks of buying foreign stocks listed on foreign exchanges. In my 3 years plus experience, I had only purchased several foreign stocks. These stocks were namely Apple Inc, Bank of America and Bank of Ireland. As one can see, buying an average of 1 stock per year seems awfully miniscule. This is because of the added risks of buying shares of a foreign company.
Perhaps the most prominent reason to research doubly hard when one is buying into a foreign company and that is the foreign currency risk. The ultimate aim of buying stock is to grow the money you have and that is achieved through capital gain and dividends. When purchasing foreign stocks, the foreign currency risk adds another layer of hindrance to the desired capital gain. A prime example is my purchase of Bank of Ireland (BKIR). I bought it at 0.34 EUR back in 21 February 2014. As of today, I have an approximate gain of 6% at 0.36 EUR. BKIR Chart
Admittedly, the gain is not up to standard given the time invested. Now, take a look at the EUR-SGD rate. On 21 Feb 2014, the rate stood at 1.7346. Today, it is a whopping low of 1.4492 - a drop of almost 17%. As you can see, my capital gain was wiped out by my currency loss. Foreign currency risk needs no further explanation.
Knowledge is king as many once said. Keeping in times with financial news is important when it comes to stocks. Many a times, news can convey a sense of general sentiment in the stock market. Also, crucial news will reach you last unless you are specifically hunting for it (eg. results release). I normally use Google Alerts to update me of any news related to the foreign companies I buy into. However, it is not enough in my opinion as I am not in the midst of the "battlefield". In the case of Bank of Ireland, I am unsure of Irish opinions on the bank. I am unsure of BKIR's reputation in Ireland. I am unsure of its scale within Ireland. These are some of the many uncertainties that one have to deal with when buying into a foreign company and thus foreign stocks are not suitable for investors without much experience.
Another disadvantage of buying foreign stock is dealing with different time zones. If you own European stock, the market opens in the afternoon and closes at SG evening time. That seems fine enough. If you hold US stocks, the market only opens ~ 9pm and closes just before you wake up. In the time that you are asleep, crucial news might emerge and affect stock markets without you knowing. That is the stuff one has to deal with when buying foreign stock.
Despite all these shortcomings, one might consider buying foreign stock due to several reasons. One might be to diversify stock holdings out of one's country. Second, it might be due to the long time horizon of a stock where you have faith in. As a result, short term fluctuations that might be disadvantageous to investors would not be significant. However, as mentioned earlier, it is not advisable to invest in foreign stock unless one accumulated enough experience in the market.
1) Foreign Currency Risk
Perhaps the most prominent reason to research doubly hard when one is buying into a foreign company and that is the foreign currency risk. The ultimate aim of buying stock is to grow the money you have and that is achieved through capital gain and dividends. When purchasing foreign stocks, the foreign currency risk adds another layer of hindrance to the desired capital gain. A prime example is my purchase of Bank of Ireland (BKIR). I bought it at 0.34 EUR back in 21 February 2014. As of today, I have an approximate gain of 6% at 0.36 EUR. BKIR Chart
Admittedly, the gain is not up to standard given the time invested. Now, take a look at the EUR-SGD rate. On 21 Feb 2014, the rate stood at 1.7346. Today, it is a whopping low of 1.4492 - a drop of almost 17%. As you can see, my capital gain was wiped out by my currency loss. Foreign currency risk needs no further explanation.
2) Lack of Information
3) Different Time Zones
Despite all these shortcomings, one might consider buying foreign stock due to several reasons. One might be to diversify stock holdings out of one's country. Second, it might be due to the long time horizon of a stock where you have faith in. As a result, short term fluctuations that might be disadvantageous to investors would not be significant. However, as mentioned earlier, it is not advisable to invest in foreign stock unless one accumulated enough experience in the market.
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