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Investment Fraud
Why have Americans been investing in foreign markets in increasing
numbers?
Two of the chief reasons why people invest
internationally are:
1) Diversification --spreading your investment risk among foreign
companies and markets that are different than the U.S. economy.
2) Growth --taking advantage of the potential for growth in some
foreign economies, particularly in emerging markets.
Of course, you have to balance these considerations against the possibility
of higher costs, sudden changes in value, and the special risks of
international investing.
You can see from the table below that international
investment returns sometimes move in a different direction than
U.S. market returns. The table shows changes in:
a) the MSCI EAFE® Index, a well-known index of stocks
in more developed foreign markets,
b) the MSCI Emerging Markets Force (EMF SM ) Index, and
c) the Standard & Poor ’s 500, an index of large U.S.
companies.
Even when international and U.S. investments move in the same direction the
degree of change may be very different. When you compare the returns from
emerging markets you see even wider swings in value.
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What are the special risks in international investing?
Although you take risks when you invest in any stock, international
investing has some special risks:
Changes in currency exchange rates. When the exchange rate between the
foreign currency of an international investment and the U.S. dollar changes,
it can increase or reduce your investment return.
How does this work?
Foreign companies trade and pay dividends in the
currency of their local market. When you receive dividends or sell your
international investment, you will need to convert the cash you receive into
U.S. dollars.
During a period when the foreign currency is strong
compared to the U.S. dollar, this strength increases your returns because
your foreign earnings translate into more dollars. If the foreign currency
weakens compared to the U.S. dollar, this weakness reduces your returns
because your earnings translate into fewer dollars.
In addition to exchange rates, you should be aware that some countries may
impose foreign currency controls that restrict or delay you from moving
currency out of a country.
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Dramatic changes in market value. Foreign markets,
like all markets, can experience dramatic changes in market value. One way
to reduce the impact of these price changes is to invest for the long term
and try to ride out sharp upswings and downturns in the market.
Individual investors frequently lose money when they
try to "time" the market in the United States and are even less likely to
succeed in a foreign market. When you "time" the market you have to make two
astute decisions --deciding when to get out before prices fall and when to
get back in before prices rise again.
Political, economic and social events. It is difficult for investors to
understand all the political, economic, and social factors that influence
foreign markets. These factors provide diversification, but they also
contribute to the risk of international investing.
Lack of liquidity. Foreign markets may have
lower trading volumes and fewer listed companies. They may only be open a
few hours a day. Some countries restrict the amount or type of stocks that
foreign investors may purchase. You may have to pay premium prices to buy a
foreign security and have difficulty finding a buyer when you want to sell.
Less information. Many foreign companies do not provide investors with the
same type of information as U.S. public companies.
It may be difficult to locate up-to-date
information, and the information the company publishes may not be in
English.
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Reliance on foreign legal remedies. If you have a problem with your
investment, you may not be able to sue the company in the United States.
Even if you sue successfully in a U.S. court, you may not be able to collect
on a U.S. judgment against a foreign company. You may have to rely on
whatever legal remedies are available in the company's home country.
Different market operations. Foreign markets often operate differently from
the major U.S. trading markets. For example, there may be different periods
for clearance and settlement of securities transactions. Some foreign
markets may not report stock trades as quickly as U.S. markets. Rules
providing for the safekeeping of shares held by custodian banks or
depositories may not be as well developed in some foreign markets, with the
risk that your shares may not be protected if the custodian has credit
problems or fails.
What are the costs of international investments?
International investing can be more expensive than investing in U.S.
companies. In smaller markets, you may have to pay a premium to purchase
shares of popular companies. In some countries there may be unexpected
taxes, such as withholding taxes on dividends.
Transaction costs such as fees, broker's
commissions, and taxes often are higher than in U.S. markets. Mutual funds
that invest abroad often have higher fees and expenses than funds that
invest in U.S. stocks, in part because of the extra expense of trading in
foreign markets. In 1998, for example, world or non-U.S. equity mutual funds
had a median expense ratio of 1.78%, compared to 1.31% for general U.S.
equity funds.*
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What are the different ways to invest internationally?
Mutual Funds. One way to invest internationally is through mutual funds.
There are different kinds of funds that invest in foreign stocks.
Global funds invest primarily in foreign companies, but may also invest in
U.S. companies.
International funds generally limit their investments to companies outside
the United States.
Regional or country funds invest principally in companies located in a
particular geographic region (such as Europe or Latin America) or in a
single country. Some funds invest only in emerging markets, while others
concentrate on more developed markets.
International index funds try to track the results of a particular foreign
market index. Index funds differ from actively managed funds, whose managers
pick stocks based on research about the companies.
International investing through mutual funds can reduce some of the risks
mentioned earlier in international investing and have the resources to
research foreign companies.
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The fund will handle currency conversions and pay
any foreign taxes, and is likely to understand the different operations of
foreign markets. Like other international investments, mutual funds that
invest internationally probably will have higher costs than funds that
invest only in U.S. stocks.
If you want to learn more about investing in mutual
funds, information is available at no charge in our brochure Invest Wisely
--An Introduction to Mutual Funds. You can get a copy from our Web site (www.sec.gov
) or by calling our toll free number, 1-800-SEC-0330.
American Depositary Receipts. The stocks of most foreign companies that
trade in the U.S. markets are traded as American Depositary Receipts (ADRs)
issued by U.S. depositary banks. Each ADR represents one or more shares of a
foreign stock or a fraction of a share. If you own an ADR you have the right
to obtain the foreign stock it represents, but U.S. investors usually find
it more convenient to own the ADR. The price of an ADR corresponds to the
price of the foreign stock in its home market, adjusted for the ratio of
ADRs to foreign company shares.
Owning ADRs has some advantages compared to owning foreign shares directly:
When you buy and sell ADRs you are trading in the U.S. market. Your trade
will clear and settle in U.S. dollars.
The depositary bank will convert any dividends or other cash payments into
U.S. dollars before sending them to you.
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The depositary bank may arrange to vote your shares for you as you instruct.
On the other hand, there are some disadvantages:
It may take a long time for you to receive information from the company
because it must pass through an extra pair of hands. You may receive
information about shareholder meetings only a few days before the meeting,
well past the time when you could vote your shares.
Depositary banks charge fees for their services and
will deduct these fees from the dividends and other distributions on your
shares. The depositary bank also
will incur expenses, such as for converting foreign currency into U.S.
dollars, and usually will pass those expenses on to you.
U.S.-Traded Foreign Stocks.
Although most foreign stocks trade in the U.S. markets as ADRs, some foreign
stocks trade here in the same form as in their local market. For example,
Canadian stocks trade in the same form in the United States as they do in
the Canadian markets, rather than as ADRs.
Stocks Trading on Foreign Markets. If you want to buy or sell stock in a
company that only trades on a foreign stock market, your broker may be able
to process your order for you. These foreign companies do not file reports
with the SEC, however, so you will need to do additional research to get the
information you need to make an investment decision. Always make sure any
broker you deal with is registered with the SEC. It’s against the law for
unregistered foreign brokers to call you and solicit your investment.
What should I do if I want to invest?
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International investments are like any other investment. You should learn as
much as you can about a company before you invest. Try to learn about the
political, economic, and social conditions in the company’s home country, so
you will understand better the factors that affect the company’s financial
results and stock price. If you invest internationally through mutual funds,
make sure you know the countries where the fund invests and understand the
kinds of investments it makes.
Some sources of information:
SEC reports. More than 1,100 foreign companies file reports with the SEC.
The SEC doesn’t require foreign companies to file electronically, so their
reports usually are not available through the SEC’s Web site. You can get
paper copies from our Public Reference Branch by calling (202) 942-8090 or
by writing them at Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, DC 20549. We charge a copying fee for this service.
Mutual fund firms. You can get the prospectus for a particular mutual
fund directly from the mutual fund firm. Many firms also have Web
sites that provide
helpful information about international investing.
The company.
Foreign companies often prepare annualreports, and
some companies also publish an English language version of their annual
report.
Ask your broker for copies of the company’s reports or check to see if they
are available from the SEC. Some foreign companies post their annual reports
and other financial information on their Web sites.
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Broker-dealers. Your broker may have research reports on particular
foreign companies, individual countries, or geographic regions. Ask whether
updated reports are available on a regular basis. Your broker also may be
able to get copies of SEC reports and other information for you.
Publications. Many financial publications and international business
newspapers provide extensive news coverage of foreign companies and markets.
Electronic information. Information about foreign companies may be
available on the Internet. You should be wary, however, of “hot tips,”
overblown statements, and information posted on the Internet from unfamiliar
sources.
You can find information about how to protect yourself from
investment fraud
over the Internet by looking to the “Investor Assistance and Complaints”
section of our website (www.sec.gov )
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Tracking down information on international investments requires some
extra effort, but it will make you a more informed investor. One of the most
important things to remember is to read and understand the information
before you invest.
If you have more questions or if you have a problem with your international
investment, our Web site is www.sec.gov and our e-mail address is help@sec.gov.
You can get more educational brochures by calling toll-free
1-800-SEC-0330.
You also can contact us at this office:
Office of Investor Education and Assistance
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