There are several categories which divide and define Equity Markets. These markets can be divided by geographic market and economic market. There are two specific geographical categories for investment, which are related to the location of the potential shareholder. These categories are the domestic market, and the foreign market. The domestic market is the market in which you reside; the foreign market is the market outside of your nation or region. A domestic market, even if this is the American market, makes up a small portion of total available shares. Foreign markets will always offer, no matter which nation resided, a wider selection of total equity than your domestic nation.
If you only invest inside your geographic market, you are ignoring the massive share selection available. You also incur additional risks. If a domestic equity market crashes, shareholders who are invested purely in that domestic market can experience loss across their entire portfolio. Investors who have a section of their investments in foreign markets will see portions of their investment shares untouched by region centric crashes. Foreign investing results in reduced market risk.
Correlation and Location
There are exceptions to this rule. If a foreign investment has substantial business in your domestic market, it will suffer when your market suffers. This is especially true if the market is a primary source of business for the firm behind the equity. This is known as a “high correlation”. Firms with high correlations are overexposed to domestic downturns due to their connections. You should seek market diversification by investing internationally, reducing portfolio ties to your domestic market. This is achieved by purchasing foreign equities with low correlations. These firms are highly unlikely to crash when the local market crashes. The result is your portfolio suffers less damage during downswings.
There are benefits to investing internationally, but there are risks as well. Foreign exchanges and foreign markets have foreign rules for investment. They also have foreign accounting standards. This means that the investment rules and the information standards are both different overseas. If you expect a foreign market to function like your domestic market, you may be in for an unpleasant surprise if a crucial trade needs to function a specific way. Different regions and nations have different rules.
Foreign Regulatory Risk
Finally, a foreign investment market will have a different quality of regulation. This regulation, depending on your home market, may be stronger or weaker. If stronger, note regulations so that you do not cross them. If weaker, you need to be aware of these weaknesses and the problems which may result. It’s better to be aware than to be caught unexpectedly.
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International Economic Analysis:
- Major Currency Economic Summaries
- Performance of Major Imports and Exports
- Mandates of Central Banks versus Expectations
- Performance Indexes of Major Economies
- Economically Correlated Currency Projections
- Large Funds Currency Sentiment Readings
- List of Technical Indicators to Look For
- Occasional: Foregin Exchange Technicals Markups
American Markets Analysis:
- Summaries of American Economic Structure
- Performance of Major
- Federal Reserve Mandate versus Expectations
- Performance Indexes of U.S Economy
- Economically Correlated U.S Dollar Projections
- Large Trading Fund Index Sentiment Readings
- Market Wide Earnings Versus Valuations
- Fundamental Ranking of U.S Business Sectors
- Best and Worst Future Consensus Estimates
- Occasional: Firm Fundamental Strength Report
- List of Technicals to Look for While Trading
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