It is possible. In fact, it is often very easy.
Foreign Stock
While buying stock in U.S.-based companies is by far most common for U.S. residents, it is possible to get exposure to foreign companies.
Why
Why would one want to buy stock in non-U.S. companies? It is a question worth asking. For some, this would never occur to them. However, others would consider it.
Foreign exposure is often non-correlated with the U.S. markets. What is “non-correlated”? Non-correlated means that they often do not react in tandem. Namely, U.S.-based markets often rise and fall together. Foreign markets often move independently. This means that a decline in the US will often not be matched by a decline in other countries. And often a rise in foreign markets is not always matched on U.S. exchanges.
Currencies
Since foreign companies exist in other countries with their own currencies, owning stock in foreign companies means one has exposure to the currency and business climate in those countries. This can be a double-edged sword. It can offer some insulation from fluctuations of the U.S. dollar.
Business Environment
Foreign companies often have brands, products, and business practices that differ from U.S.-based companies. This allows the investor some additional diversification.
What To Look In Foreign Companies
Of course, buying stock anywhere in any company in any country involves risk. One should do one’s due diligence to be sure it is a worthwhile investment.
Fees, Taxes, and other possible Complications
While fees and taxes are always a consideration, when investing in foreign companies these may be different than one is used to domestically.
Most countries tax dividends differently than in the U.S. Capital gains taxes may also be different.
How It Is Done
Foreign companies that wish to sell their stock on U.S. exchanges usually enter into an agreement with a U.S. bank through an arrangement called American Depository Receipts or American Depository Shares. These allow trading for these receipts on U.S. exchanges and to be traded in U.S. dollars. The banks also handle for the distribution of dividends to be also in U.S. dollars.
In essence, the U.S. bank holds the actual shares in a branch office the country of origin, and issues the ADRs in the U.S. for U.S.-based investors. These ADRs are traded on U.S. exchanges in U.S. dollars.
Benefits
There are several benefits of the use of ADRs. Firstly, they are traded in U.S. dollars on U.S. exchanges. Secondly, the individual investor does not need to deal with the foreign country’s currency. Thirdly, use of ADRs removes some IRS reporting complications.
Fees and Taxes
The bank sponsoring the ADRs usually levies a fee. This can amount to a fraction of a cent per share per quarter up to a few cents per share per quarter. This ADR fee is deducted from the dividends paid to you by the foreign company.
In addition, the foreign country itself may levy taxes against the dividends. In some cases, but not all, these taxes can be avoided.
In some cases, foreign dividend tax may be avoided if the foreign country and the U.S. have a tax treaty eliminating the need for foreign dividend taxes. In the most common case, if the ADRs are held in a U.S. retirement account (e.g., IRA, etc.) foreign dividend taxes can be avoided for companies from Canada and the U.K. Other arrangements are in place for some other countries. It is best to investigate each situation individually, since there are no hard and fast rules.
Most noticeably, France and the U.S. do not have such a treaty, so all dividends paid by French companies to U.S. residents have French tax withheld.
For stocks not in a retirement account, taxes paid to a foreign country may sometimes be deducted from one’s U.S. tax return. Check with your financial advisor.
Have you dipped your toes into ADRs? What is your experience? Let me know here.
The gorget pictured was the kind carved out of conch shell, and traded all along the Gulf Coast. Worn as chest ornaments, they were a marker of influence and standing in ancient Mississippian culture, c. 1200-1350. Courtesy Minneapolis Museum of Art.
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