Investing in overseas shares
International shares can give you investment opportunities that
are not available in Australia, as well as provide extra
diversification. However, there are risks you should be aware of
before you add international shares to your portfolio.
Here we explain how to invest in international shares and how to
decide if they are right for you.
Comparing the Australian
share market to the world's markets
The Australian share market has total market capitalization of
$1.7 trillion, (as at July 2015) which represents only around 2% of
the world's total share market value.
Australia's major stock exchange, the Australian Securities
Exchange (ASX) is the fifteenth largest in the world by market
capitalisation, but is relatively small when compared to other
The Australian share market is heavily weighted toward the
financial and mining sectors, which account for 60% of the ASX All
International share markets also tend to be dominated by a few
industry sectors. For example, the biggest players in the US
markets are the information technology and financial sectors.
Investing in international shares can give Australian investors
exposure to large companies in sectors that may not be well
represented in the Australian market.
Benefits and risks of
Benefits of international shares
Here are some of the benefits of investing in international
- More options - Investors are able to invest in
companies, industries and asset classes that are not represented,
or are underrepresented, in the Australian share market.
- Diversification - International shares can
provide investors with geographic as well as asset class
diversification. This means a slowdown in one market will have less
of an impact on your portfolio.
Risks of international shares
Investing in international shares carries many of the same risks
as investing in Australian shares but there are also some risks
that are unique to global investments. These include:
- Currency risk - Foreign shares are held in the
currency of the country of origin. Income and capital gains or
losses must be converted into Australian dollars (AUD) which means
you are exposed to additional volatility from movements in exchange
rates. If the value of the AUD rises against a particular currency,
the value of investments held in that currency will fall. Also a
fall in the AUD will increase the value of your investments.
- Political and regulatory risk - International
shares are subject to country-specific risks such as political and
regulatory changes. While it might be easy to keep up with these
changes in Australia it may be harder to keep track of what's
happening in other markets. You will need to understand the market
and laws relating to foreign investment in the country you are
investing in. You will also want to find reliable information
sources to help you keep track of your investments.
- Time differences - Other markets operate in
different time zones so trades and information may be delayed.
- Tax - For taxation purposes, investment income
from international investments is treated differently to income
from domestic investments. If you hold international shares and
receive income, professional tax advice is recommended.
If you are concerned about any of these risks you should seek
professional financial advice before you invest in
How to invest in international
Look around for a broker that provides the services you're
looking for at an affordable price. Services and fees can vary alot
depening on who you choose.
Typically Australians invest in
international shares in one of three ways: using a broker, through
a managed fund or through an exchange traded fund (ETF).
Most brokerage firms or online broking
services have the ability to buy and sell shares listed
on major international exchanges such as the New York Stock
Exchange, NASDAQ, London Stock Exchange and Euronext. For smaller
markets or exchanges, check whether your broker can trade on
Direct investing in international shares is significantly more
expensive than investing in Australian shares. Make sure you look
at all the fees including brokerage fees, currency conversion fees,
foreign security custody fees and internal transfer fees.
Managed funds pool your money with money from other investors
and an investment manager manages it
on your behalf.
Some funds will focus on international shares, perhaps specific
regions or industry sectors, while others will simply include
international shares as part of a diverse mix of assets.
Fund managers may have strategies in place to limit the impact
of exchange rate movements on your investment. As with any managed fund, read the product disclosure statement (PDS)
before you invest and only choose investments that are compatible
with your investment goals and risk
Exchange traded funds (ETFs)
These are investment funds listed on a stock exchange that track
the returns of a specific index or market sector. They can be
bought and sold like ordinary shares through your stock broker or
online trading account.
The ASX has a range of exchange traded funds that track a single
market index such as the ASX All Ordinaries index, a global index
such as the Global Health care index or a range of regional
indices. ETFs can be a cost effective way to gain exposure to
international shares listed on an index, but it's important that
you read the PDS to know what you are investing in and the risks
Find out more about how exchange traded funds work
and their risks.
Diversification is an essential part of managing investment
risk. Ideally you want to be diversified both within and across
Geographic diversification can lower overall investment risk.
Economies grow at different rates and at different times, so a
portfolio that is diversified geographically benefits from changes
in faster growing economies and offers some protection from slowing
Find out more about diversification.
International shares are now easier for
Australian investors to access and can be an effective way to
diversify your portfolio. However, they can involve greater risk
and higher costs than investing in Australian shares. Weigh up the
benefits and risks carefully and seek professional financial
advice if you are unsure whether international shares are right
Last updated: 01 Aug 2016