What are the benefits of buying shares abroad? I want to explain from my experience investing in the American market. There are 10+ benefits of investing in stocks in the international market.
I follow several share discussion groups on Facebook and Telegram. Apart from socializing with fellow stock players, there is a lot of new information and insights that I can receive.
One of the questions I often read is about stock investment in foreign exchanges. The response was various, one of the most frequently said was “it’s better to invest in the domestic market first, don’t have to bother going to foreign markets”.
There are concerns about investing in unfamiliar markets. Some consider it pointless to invest in stocks in the American market.
In this article, I want to describe the reasons why it is necessary and even obligatory (in my opinion) to invest in stocks on international exchanges.
I take this from my personal experience investing in American stock exchanges for several years.
Reasons to Buy Foreign Shares
1. Great Potential
Foreign markets have enormous potential.
You can become a shareholder of a global class company by investing in international markets, for example:
- McDonald’s – who doesn’t know this fast food company, even in remote corners of Indonesia there are McDonald’s outlets with the same service standards and quality of food.
- Starbucks – because almost every day I buy coffee at Starbucks stores, I want to be part owner, by buying this company’s stock on the NYSE.
- Nike – I am a sneaker lover and Nike with a cool, up to date and cutting edge shoe design, in my opinion, it is still difficult to compete with other shoe manufacturers.
- Johnson & Johnson – the largest pharmaceutical and drug company in the world whose product innovation has gone global.
You can see that by playing shares in foreign markets we can become owners of global class companies.
Not only shares in the American market, but also in other markets, such as UK, Germany, France, Hong Kong and even Saudi Arabia.
Make a note that the capitalization of one Apple company in the USA is the same as the combined capitalization of all public companies on the Indonesia Stock Exchange.
2. Portfolio Diversification
By being able to purchase shares in various countries, you have the opportunity to diversify your portfolio in the global market, which in a world of uncertainty is very important.
How to do weighting or weight in building a portfolio. What stocks and in which countries have the largest portion in the portfolio, and so on.
Is it true that 100% of the money is invested only in local exchanges?
According to financial experts, the right way to be verified is to follow the size (size) of the stock market capitalization of a country in the world. The countries with the largest market cap markets are the places where investors place the most funds, followed by other countries.
Because by investing based on the market cap, investors place their funds in the largest shares. Stocks that have the best quality.
Another advantage is that you have more flexibility in choosing company stocks according to market conditions. For example, you can more easily choose investments in countries that are recovering the fastest from the Covid-19 pandemic.
You can also buy shares of companies that have succeeded in making the Covid 19 vaccine. What you cannot do if you are only fixated on local exchanges.
One of them, Moderna, a biotech company from the USA that has succeeded in making a Covid-19 vaccine with 95% effectiveness. Amazingly, the vaccine is made very quickly, less than 1 year.
You can own Moderna shares if you buy them on an American stock exchange.
3. Many Product Choices
International exchanges offer many product variants. Starting from stocks, ETFs, indices, bonds to derivatives such as options.
The wide variety of instruments is very beneficial for investors because:
Can choose the product that best suits your needs.
Can diversify more optimally because a portfolio can be built with a variety of instruments.
One example, the American market offers a wide variety of ETFs – Exchange Traded Funds.
This instrument provides an opportunity for investors to invest in various financial instruments with small capital.
Examples of ETFs in the USA are:
Stock Indices – S&P 500, Total Market (all USA stocks), Small Cap Shares etc.
Commodities – ETFs based on commodity prices, e.g. gold, oil etc.
Real Estate – ETF based on the Real Estate property price index
Bonds – ETFs based on Bond / Bond prices
So, getting into ETFs in the USA, you could say you enter the market with a large selection of instruments, varying greatly, depending on your needs and investment goals.
For example, if you want to buy all the largest stocks in America, just buy the S&P 500 ETF which represents the 500 largest companies in Indonesia.
If you want to invest in the global property market, you can simply buy a Real Estate ETF whose contents follow property prices. No need to buy the property directly.
On the IDX, there are already ETFs, but the scale and choices are still far behind Wall Street. There are not many options and limited liquidity which makes prices inefficient.
4. Free Commission Fee
The trend in Wall Street brokers is to provide commission free transactions. Zero transaction fees.
Recently, Schwab, one of the largest brokers, announced that it does not charge a commission on buying and selling shares, aka the commission is Zero. Earlier, Schwab asked for a commission of $ 14 per flat transaction.
This zero commission policy is very beneficial for retail investors, who usually buy shares in relatively small amounts (so that the commission percentage for the transaction value becomes large).
5. Can Buy 1 Share
The minimum purchase of shares on the New York Stock Exchange (NYSE) or Nasdaq is 1 share.
Yes, you can buy only 1 share on this Wall Street exchange. In contrast to the Indonesian Stock Exchange, the minimum purchase is 100 shares.
In my opinion, the combination of Zero Commission policy and a minimum purchase of 1 share is very helpful for retail investors whose investment funds are quite limited to invest in stocks.
6. Buy ‘In Fraction’ Shares
Many worry that the stock price in the expensive American market will make it costly to start investing. For example, Google’s stock price is already above Rp. 10 million per share (it’s true I read that right, the price is 10 million).
Don’t worry, there is such a thing as buying ‘in fraction’ stocks. You buy according to the money you have.
For example, if you have $ 50, you can buy Google shares for $ 1000 with this in fraction facility.
You will receive a share proportionate to the purchase value against the share price.
The dividend will also be received if the company distributes, of course, the proportional dividend value.
This fraction allows you to buy any stock, regardless of price.
7. Forex Hedging
Investing in foreign stocks indirectly helps you to hedge against assets in US $ to deal with exchange rate fluctuations.
US $ is the currency used by 40% of world transactions. His position is relatively strong.
As an investor facing this exchange rate risk is hedging, one of which is by investing in stocks abroad.
Besides exchange rate risk, the purchasing power of US $ currency is relatively stronger than other currencies, which is reflected in lower inflation in the US.
What are the implications?
Although the return on stock investment in foreign markets, for example the United States, is lower than in the Indonesian Stock Exchange (IDX), because the purchasing power of the US $ currency is stronger, the net return (after deducting inflation) will be better in the United States.
8. Good Governance
The stock market on Wall Street has been around for decades with the largest market capitalization in the world today. The United States stock market has a 50% + share of the total global stock market.
The large number of transactions in the market, which is accompanied by high liquidity, makes the possibility of fried stocks to exist smaller because it takes huge funds to manipulate stock prices in a market as big as Wall Street.
In addition, the long life of the Wall Street stock exchange has made regulation and law enforcement well institutionalized, so that fried stocks can be minimized (although the possibility is always there, although small).
9. Just 2 million to open an account
Another concern is that it takes a large minimum investment to open an account with an American broker.
Yes or no.
I conducted a survey of several brokers in America and found that the minimum investment is quite large, namely:
Schwab. $ 25,000 minimum
Interactive Brokers. Minimum $ 10,000
However, I also met a broker who can do stock transactions in America with a minimum of only IDR 2 million, namely eToro.
eToro offers a very affordable minimum investment, not only for transactions on the American stock market, but also for the UK, Europe, Hong Kong and Saudi Arabia markets.
10. Access to Broad Research
The advantage of buying shares in a large market is that many of the shares are covered, analyzed by various parties.
I have found that American stock research materials are widely available on the internet. Both free and paid.
Stock brokers in America provide comprehensive research results on the app. Not only from one research institute but from various institutions.
Many sites, which are not brokers, also provide independent stock research results. The example is:
The results of this research are important to provide an overview of the company’s business and financial performance. Moreover, this is an overseas company that we may not have seen in person.
How to Buy American Stocks
To be able to make a purchase, you must open an account at one of the stock brokers who have trading licenses in the USA. Cannot trade without going through a broker.
Every USA broker has criteria for accepting investors. Generally the criteria are:
Citizenship. There are brokers that only accept USA citizens, but some also accept investors of all nationalities
Minimum investment. Minimum investment requirements to open an account. There are brokers who ask for a minimum investment starting from thousands of US $ but some are just a few $.
Tax. If you are an investor in the USA, you must sign a tax statement, which states that the tax filing is done in the respective country.
Stock Broker Criteria
There are many stock brokers, what criteria should you use in choosing them. I share several criteria from experience so far.
Ensure the legality of the broker by looking at the permits they have. Permission determines whether it is a legit broker or not.
Brokers list on their website what licenses they have. It can be written on the front page at the bottom, in the “about us” section or in the question and answer section.
Some of the broker licenses that I have read are quite legitimate are:
Registered with FINRA USA. You can check it at Brokercheck
Permit from UK, Financial Conduct Authority (FCA)
Permission from Australia, Australian Securities and Investments Commission (ASIC)
The countries above are known to have strict regulatory rules.
B. Affordable Deposits
The broker will set a minimum deposit to open an account. What is the minimum deposit amount depends on the policy of each broker.
Since a broker is used for transactions overseas, the minimum deposit is usually in US $. Now this amount is sometimes a burden because it must be paid in US $.
However, from my experience, there are also brokers who set an affordable minimum deposit, under IDR 5 million.
C. Easy to Deposit & Withdraw Money
Since this is an offshore broker, you need to be comfortable with how to deposit and withdraw money from stock transactions. The ease of depositing and withdrawing money from the broker is an important thing to pay attention to.
Not only about the deposit and withdrawal process, but also about the cost. Transfer fees abroad are not cheap.
I’ve met an American broker who is quite large and can only accept deposits in the form of bank transfers. The fee becomes expensive every time you want a transaction.
It can still be tricked by collecting first, then transferring it so that it saves transfer costs.
Incidentally, there are ways to be able to transfer abroad at low cost. You can read here how.
However, I have also found a broker that accepts deposits in rupiah currency.
So, investors can send money through banks in Indonesia in rupiah currency to a brokerage account. Later we will mention the exchange rate in effect when the transfer is made.
This method of transferring via a bank account in Indonesia is definitely cheaper than the US $ foreign currency transfer.
D. Virtual Trial Account
For those who want to try first, the broker provides a virtual account.
One way to ensure that the broker we are going to use is legit, trusted and has a good platform system, you can simulate trading with a trial or demo account.
Investors use trial accounts to simulate transactions exactly like ordinary transactions, only the difference is they don’t use real money. So, investors do not face the risk of loss when making transactions.
During the trial, you check all functions, features and services with a trial account, so that from here, you can judge whether this is a good broker, has a good system or not.
Although trial accounts are not 100% the same as real transactions, at least you can have an idea and confidence before starting to trade.