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What Is A Foreign Stock?
A foreign stock is the equity of a company that is headquartered outside of the United States. A foreign company can either trade on an international stock exchange, or it can issue shares in the United States either via a traditional initial public offering (IPO) or an American Depository Receipt (ADR) program.
It’s important to note the difference here. Foreign companies can apply to list directly on U.S. Stock Exchanges like the New York Stock Exchange (NYSE). Or, through an ADR program, by contrast, a financial arrangement is struck whereby a U.S. Financial Institution agrees to convert foreign stocks listed on another market into a product that is readily tradable on the NYSE, NASDAQ or Pink Sheets exchanges.
What Is A Foreign Stock Exchange?
A foreign stock exchange is a stock exchange that operates outside of the United States. A foreign stock exchange generally operates in the same way that the American ones do, except that they are based in international jurisdictions. Prominent examples include the:
- London Stock Exchange
- Tokyo Stock Exchange
- Toronto Stock Exchange
- Hong Kong Stock Exchange
- Frankfurt Stock Exchange
This is far from a complete list. In fact, just about every capitalist country of any reasonable size has a stock exchange or two operating there. Kazakhstan has a local stock exchange.
Important: Foreign stock exchanges operate under the local laws and regulations of their own jurisdiction. This means that regulatory conditions and investor protections can vary significantly from what American investors are accustomed to in their home market.
Can You Invest In Foreign Stocks?
Yes, nowadays, it is easy for American investors to put money into foreign stocks. While that may not have been true 25 years ago, there are more options than ever for international investing.
There are several main ways for Americans to invest in foreign stocks. These include:
- Purchasing an exchange-traded fund (ETF)
- Purchasing an American Depository Receipt (ADR) listing of a company
- Purchasing a foreign stock directly on its home stock exchange
ETFs
The first option, buying an ETF, can provide exposure to a wide variety of international stocks. There are ETFs which can provide a number of different portfolio aims and exposures. Examples would include international ETFs devoted to growth or value stocks, dividend stocks, large-cap or small-cap stocks and various others. There are also international ETFs based around geographic regions such as Europe, Asia, emerging markets, and so on. Many ETFs focus on investments in individual foreign countries, such as the iShares MSCI Poland Capped ETF (EPOL).
International ETFs have become a building block in many people’s holdings because they offer a tactical approach to portfolio construction. Investors that want more exposure to, let’s say, Japan, international small-caps.
ADRs
The second option is to buy an ADR. An American Depository Receipt is similar to an individual American stock, with the difference being in the underlying financial plumbing. For an ADR, a foreign company works with an American financial institution to package a number of its shares together and list them on an American stock exchange. An investor buys the ADR and owns shares in the foreign business.
For some companies an ADR ratio applies, particularly if their home market has a weaker currency. Suppose a Japanese company has a share price of 140 Japanese Yen. This would result in a stock price of just USD $1. The company could use an ADR ratio of 10:1, meaning that each ADR would contain ten shares of the underlying Japanese company. In this way, the Japanese ADR would have a more normal $10 stock price instead of appearing as a penny stock on the American market.
Direct Foreign Ownership
Finally, there is the option to buy a company directly on its home exchange. This used to be expensive and difficult, but has become much more common in recent years. Nowadays, with an American brokerage account, it’s possible to trade in markets as diverse as Germany, Hong Kong, and Mexico directly.
Suppose that an investor wants to buy stock in a French winemaker that is too small to bother with sponsoring a U.S. ADR program. The investor may be able to locate the company on their U.S. online brokerage, type in the company’s French ticker, and place a buy order. In some cases such purchases cannot be made online, and the investor must call their brokerage’s trading desk.
The brokerage will convert the investor’s dollars to euros and make the transaction. The investor will own shares of the winemaker directly in France, quoted in euros, and have all the normal shareholder rights associated with owning a company in France. You may even receive investor materials in French.
Other Foreign Company considerations
There are some unique considerations from owning a foreign stock. In all cases, there are currency implications. Let’s suppose a Canadian company has a stock price of $20 Canadian Dollars on the Toronto Stock Exchange. With a listing in the United States, equivalent shares may trade at around USD $15 each due to the difference in exchange rates between the two countries. If the Canadian Dollar depreciates in value (versus USD), the price gap will expand further – it’s possible the Canadian stock price increases from CAD $20/share to CAD $22/share but that the USD share price doesn’t advance at all.
Taxation differences, and corporate governance/regulation of foreign companies are also important considerations for American investors owning foreign stocks.
Why Do People Invest In Foreign Stocks?
Around half of the world’s total equity market capitalization is contained outside of the United States. And the vast majority of the world’s population and GDP is located outside of the U.S. As such, it’s often attractive for investors to increase diversification by having some international holdings.
Benefits include:
- Reduced overall portfolio risk if the U.S. economy is suffering but international economies are not.
- Potential to gain from new industries or investment trends taking-off overseas.
- Having access to high-quality companies based outside of U.S. shores.
- Reduced portfolio volatility.
- Having a broader investable landscape from which to find compelling opportunities.
What Happens When A Foreign Stock Is Delisted?
One particular concern with foreign stocks is that, just like American companies, they can be delisted.
Involuntary delistings occur when a company fails to maintain sufficient financial strength, a high enough share price, or it fails to file required regulatory paperwork on time. Foreign companies may see the same thing that happens to many American companies; that is to say, their stock is removed from the Nasdaq or NYSE for non-compliance and starts trading over-the-counter on the Pink Sheets.
There can also be voluntary delistings. Sometimes foreign companies elect to abandon their listings in the U.S. or another foreign country due to lack of investor interest, the cost and effort of adhering to stock exchange regulations or reporting requirements (ie – with the SEC) in multiple countries, or for other reasons. For example, in 2019 Britain’s BT Group decided to delist from the NYSE and terminate their ADR program. In this case, the former ADR shares would normally move to the Pink Sheets and continue trading there.
U.S. listings of foreign stocks can also disappear following normal corporate actions, such as takeovers and acquisitions.
Note: Liquidity often dries up almost entirely for foreign stocks with a Pink Sheets listing. In addition, American shareholders may not easily be able to exercise their rights in a foreign equity that is undergoing bankruptcy or financial restructuring.
Does The S&P 500 Include Foreign Stocks?
No, it does not. According to a factsheet (.pdf) published by S&P Dow Jones Indices, which operates the index, the S&P 500 holds a 100% portfolio weighting to United States securities. And, specifically, ADRs are ineligible to be included in the index. That is to be expected, as the S&P 500 was designed to serve as a benchmark for the returns of the 500 largest American companies.
With that said, multinational companies based in the U.S. may have substantial international operations. For example, more than 50% of Apple’s (AAPL) revenue comes from overseas. So investors who only purchase U.S. stocks, or ETFs like the popular SPDR S&P 500 Trust ETF (SPY), will still have some international exposure in their portfolio.
Examples Of Foreign Stocks
A large number of foreign stocks listed in the United States are ADRs of companies which are multinationals and have worldwide businesses. As such, their products and brands resonate with investors across the globe, and having multiple listings helps establish access to a broader pool of investment capital and potential stakeholders. Examples of these sorts of companies would include:
There are also a number of foreign companies, often from emerging markets, who choose to make a prominent stock listing in the United States due to the greater access to capital in America. For example, many Chinese companies such as Alibaba (BABA) have garnered international headlines for their high-profile U.S. IPOs.
As far as ETFs go, the number of international ETFs and mutual funds runs into the many hundreds, if not thousands. Some prominent ones listed below give a sense of the offerings available:
- Vanguard Total International Stock ETF (VXUS)
- iShares MSCI Emerging Markets ETF (EEM)
- Vanguard FTSE Europe ETF (VGK)
- Schwab International Equity ETF (SCHF)
- Vanguard International Dividend Appreciation ETF (VIGI)
This list is hardly exhaustive; there is an international ETF for just about every theme and country imaginable.
Researching Foreign Investments on Seeking Alpha
Seeking Alpha features stock pages for foreign companies that trade directly on a U.S. exchange, as well as ADRs and international ETFs. Investors interested in learning more about international investing can visit Seeking Alpha’s Global Investing Center.
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