Understanding International Stocks & American Stocks
Key takeaways
Discover the basics of international stocks versus American stocks and how global investing can diversify your portfolio.
Learn about the key differences in market dynamics, risks, and benefits of investing internationally.
Understand how home bias affects investor choices and why global diversification matters.
What are international stocks?
International stocks are equities traded on exchanges outside of the U.S. They offer investors the opportunity to gain exposure to global markets, providing access to industries and sectors that may not be prominent in the U.S. In today’s interconnected world, investing in foreign stocks is a strategic way to diversify a portfolio, as markets in Europe, Asia, and emerging economies (such as Brazil, India, and China) present unique growth opportunities.
By adding international stocks, investors can tap into the economic expansion of regions that may be experiencing different growth cycles than the U.S. For example, emerging markets often see higher growth rates, while developed markets provide stability. As global economic interdependence increases, the diversification offered by international investments becomes even more important, helping reduce risk and enhance returns. This approach allows investors to benefit from worldwide growth, making their portfolios more resilient to local economic downturns or market volatility.
What is "home bias" in Investing?
"Home bias" refers to the tendency of investors to favor domestic stocks over foreign equities, a common inclination driven by familiarity and comfort with local markets. Many investors assume that because they understand their country’s economy, investing primarily in domestic stocks is safer and more predictable. This approach can limit portfolio diversification and expose investors to risks tied closely to their home economy. By focusing too heavily on American stocks, investors may miss opportunities for growth in international markets and lose out on the benefits of diversifying across different economic cycles and regions.
Expanding into foreign markets helps to counterbalance the risks of home bias, reducing concentration risk and making a portfolio more resilient to localized economic downturns. In today’s interconnected global economy, a balanced approach that includes international exposure can help investors achieve a more stable, diversified portfolio aligned with a broader range of growth opportunities.
Why invest in international stocks?
Investing in international stocks opens up a broader array of industries, sectors, and economic growth drivers not always available in the U.S. economy. Different market conditions and economic cycles across countries can help improve portfolio resilience, providing potential gains even when U.S. markets face downturns. For example, emerging markets like Brazil and India offer high growth prospects in sectors like technology, infrastructure, and consumer goods, while developed markets such as Japan and Germany provide stability and steady returns.
Global investments also offer attractive valuation opportunities, as stocks in some foreign markets may be undervalued relative to their U.S. counterparts, making them appealing from a cost perspective. Moreover, investing globally allows for reduced dependence on the U.S. economy, providing diversification that spreads risk across different regions and sectors. This approach enables investors to capitalize on global economic trends, potentially boosting long-term returns and increasing overall portfolio stability.
Recent overview of non-US markets' performance
In recent years, non-U.S. markets have demonstrated mixed but promising performance compared to the robust growth seen in U.S. stocks. European markets, particularly in sectors like technology, energy, and manufacturing, have shown steady growth, supported by a push for green energy and innovation in digital industries. Asian markets, including Japan and South Korea, have also performed well, especially in electronics and automotive sectors.
Emerging markets in Asia and Latin America have shown resilience and a strong rebound following the pandemic, fueled by economic recovery and rising demand for commodities, technology, and consumer goods. Countries like India and Brazil have led growth in these regions, benefiting diversified portfolios. Factors like geopolitical tensions, inflation, and currency fluctuations continue to impact these markets, adding an extra layer of risk. For U.S. investors, these non-U.S. markets offer valuable diversification opportunities, often moving independently of American markets and allowing exposure to unique growth drivers around the world.
Investing in Multi-National Corporations (MNCs) vs. international stocks
Investing in U.S.-based multinational corporations (MNCs) offers indirect exposure to global markets, as these companies often generate significant revenue abroad. This strategy allows investors to benefit from international growth while navigating familiar U.S. regulatory and tax structures. However, MNCs may not fully capture the unique opportunities and risks present in specific foreign economies.
Direct investment in international stocks, on the other hand, provides targeted exposure to particular countries or regions. This approach enables investors to access growth potential in specific markets, such as emerging economies, that might be less reflected in MNC performance. Combining both strategies can enhance portfolio diversification, offering balanced exposure to global growth while managing region-specific risks.
Potential risks to American investors
Investing in international stocks presents unique risks that American investors should consider carefully. One primary risk is currency fluctuation. Changes in foreign exchange rates can affect the value of international investments, potentially diminishing returns when converted back to U.S. dollars. Political instability in certain regions is another significant risk, as sudden changes in government, economic policies, or civil unrest can lead to market volatility and impact stock performance.
Regulatory differences also pose challenges. Foreign markets may follow distinct accounting standards, reporting requirements, and disclosure norms that make it harder for U.S. investors to assess a company's financial health accurately. Additionally, investors may face tax withholding on dividends or capital gains, which can vary widely from U.S. tax regulations and may reduce overall returns.
Understanding and managing these risks is essential for a balanced international investment strategy. By researching foreign markets thoroughly and considering tools like currency hedging or tax-efficient accounts, American investors can better navigate the complexities of international investing and potentially mitigate the impact of these risks on their portfolios.
Potential benefits to American investors
Investing in international stocks can offer American investors access to industries and sectors that are less prominent in the U.S., such as advanced automotive, specialized manufacturing, and certain technology niches. This expanded exposure can help investors tap into growth opportunities around the globe, where specific industries may be more developed or experience faster expansion than in the domestic market.
One significant advantage of international investments is enhanced diversification. By spreading investments across different regions, investors can mitigate the risks associated with U.S.-specific economic downturns, political shifts, or industry challenges. For example, a slump in the U.S. market might be balanced by growth in emerging markets, where economies often follow different cycles.
International investments also allow investors to capitalize on economic growth in regions with rising middle classes, infrastructure expansion, and emerging consumer demand. Overall, incorporating international stocks into a portfolio provides American investors with a broader range of opportunities, helping to strengthen portfolios through both geographical and industry-based diversification.
Diverse stock market tiers
Developed markets (DM)
Developed markets, including nations like Japan, Germany, and the UK, are characterized by stable economies, well-established financial systems, and robust legal frameworks. These markets generally experience slower but steady growth rates compared to emerging or frontier markets, making them attractive to investors seeking reliability and lower-risk opportunities. Developed markets are often associated with political stability, transparent regulatory environments, and consistent economic policies, which contribute to predictable investment outcomes.
Investing in developed markets offers the advantage of accessing mature industries, reliable corporate governance, and advanced infrastructure. Additionally, companies in developed economies typically adhere to stringent reporting standards, enhancing transparency for investors. However, because these markets are more mature, they may present fewer high-growth opportunities compared to emerging markets.
For many investors, developed markets serve as a foundation for a balanced portfolio, providing a level of stability that can help offset the volatility associated with higher-risk regions. While returns in developed markets may be more modest, the reduced risk and dependable growth often align well with long-term investment strategies focused on capital preservation and steady appreciation.
Emerging markets (EM)
Emerging markets (EMs) are countries with rapidly developing economies and increasing industrialization, such as Brazil, China, and India. These markets typically offer higher growth potential than established markets due to factors like expanding consumer bases, ongoing infrastructure projects, and economic reforms. Investors are often attracted to EMs for their potential to deliver substantial returns as these economies mature and integrate more fully into the global economy.
However, emerging markets also come with increased volatility and unique risks. Political instability, regulatory changes, and currency fluctuations can all impact market performance. Additionally, EMs may experience more pronounced economic cycles, which can lead to sharp fluctuations in stock prices and investor sentiment. Despite these risks, the strong growth trajectory in EMs provides compelling opportunities for diversification and return potential in a well-balanced portfolio.
For investors with a long-term outlook and a tolerance for risk, EMs offer exposure to high-growth sectors and evolving industries that can complement investments in more stable, developed markets.
Frontier markets (FM)
Frontier markets (FMs) are emerging economies in the early stages of development, offering unique, high-growth potential for investors willing to take on greater risks. Countries like Vietnam, Kenya, and Nigeria exemplify these markets, which often experience rapid economic expansion due to rising consumer demand, infrastructure development, and an increasing middle class.
But FMs come with distinct challenges. They are generally less liquid than more established markets, meaning that buying and selling shares can be slower and may involve wider price swings. Regulatory frameworks and investor protections are often less developed, increasing exposure to political and economic instability. Additionally, these markets can be more susceptible to currency fluctuations and may face challenges such as limited financial transparency and less reliable data.
For investors with a long-term perspective and high risk tolerance, frontier markets offer diversification opportunities and potential for outsized returns as these economies grow. Investing in FMs requires careful consideration of these unique risks, but they can provide valuable portfolio diversification and the chance to benefit from early-stage economic growth in promising regions.
Key differences between international & American stocks
Investing in international stocks differs significantly from American stocks due to variations in regulatory, economic, and political landscapes. International stocks, especially those in emerging markets, often face unique challenges, such as less regulatory oversight and greater political risk, which can lead to higher volatility. Developed markets, like Europe and Japan, typically offer more stability and established regulatory systems similar to those in the U.S., providing steadier returns.
Another key factor is currency exchange risk. Fluctuations in foreign exchange rates can impact returns for U.S.-based investors holding international stocks, potentially leading to gains or losses independent of the stock’s actual performance in its local market. Additionally, economic cycles in different countries may not align with the U.S. economy, creating potential for diversification in a global portfolio.
Understanding these differences is critical for investors, as it enables informed decisions about risk tolerance and diversification across various global markets, enhancing portfolio resilience and return potential.
How to buy international & American stocks on moomoo
To start buying international and American stocks on moomoo:
Log in to your moomoo account – Open the app and navigate to the main dashboard. See here if you need help registering and opening a moomoo brokerage account.
Search for the stock – Enter the stock symbol or name in the search bar. If you need some help to find stocks based on a criteria, you can use the moomoo stock screener.
Review stock details – Access free Level 2 data* with a funded account and other analysis tools to make an informed decision.
Select buy – Choose your order type, quantity, and confirm your purchase.