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The stock market in the United States is known for having some of the most fantastic stocks in the world, such as Google, Facebook, and General Motors. Because of the fast-rising economy, investing in global stocks provides the best exposure to growth.
Semi-recently, the hotties* over at Vanguard said that they think that the stock market returns are probably going to suck some donkey dick in the next decade. (My words, not theirs.) And I tend to agree with them.
(*Us finance dweebs love Vanguard; they were one of the first to offer low-cost, index (non-managed) funds because the founder, John Bogle, realized pretty early on that managed mutual funds are a huge scam.)
New Post has been published on UNDERVALUED STOCKS
New Post has been published on https://www.undervaluedstocks.info/foreign-currency-transactions-exposures/
Foreign currency transactions and exposures
When one starts investing in foreign stocks, one must learn to work with foreign currencies. When one buys a foreign stock, one must have sufficient local currency to settle the trade. U.S. Dollars will not suffice. When one sells a foreign stock, one will receive foreign currency. It is up to the investor to exchange that foreign currency for U.S. Dollars.
Foreign currency is an issue not just in the buying and in the selling of foreign stocks. Let’s imagine that one owns a foreign stock but otherwise owns no foreign currency. One must still think about foreign currency exposure because the foreign stock is priced in the foreign currency. When Japanese stocks trade in Japan, the trading occurs in Yen not Dollars. If the stock does not rise or fall but the currency moves, one’s net worth (expressed in U.S. Dollars) will move solely because of the movement of the currency.
If one opens an account with a brokerage firm like Interactive Brokers, one has three options for managing currency exposure:
Exchange currencies;
Borrow currencies;
Hedge currencies using futures.
Exchange Currencies
One can exchange currencies as part of one’s investment program. This means if one needs Japanese Yen to settle a trade, one sells U.S. Dollars to buy Japanese Yen.
The sale of a Japanese stock will settle in Japanese Yen. If one needs U.S. Dollars, one sells the Japanese Yen to buy the needed U.S. Dollars.
Interactive Brokers charges a commission every time it exchanges currencies. The commission is small.
Borrow Currencies
Companies like Interactive Brokers also provide foreign currency margin loans. Instead of having to convert U.S. Dollars into Japanese Yen in order to settle the purchase of a Japanese stock, one simply borrows as many Yen as one needs to settle the trade. When one sells the stock, the proceeds from the sale (in Japanese Yen) are used to pay down the Japanese Yen margin loan.
Margin loans are a natural currency hedge. One owns a foreign currency asset (the foreign stock) and incurs an offsetting foreign currency liability (the margin loan).
The brokerage firm charges interest on outstanding loan balances. One must maintain sufficient collateral to avoid margin calls.
Hedge Currencies using Futures
One can use futures to hedge currency exposures. When one enters into a futures contract, one agrees to receive or to deliver foreign currency at a specific time in the future.
If one has a long futures position, one agrees to receive the foreign currency. Economically, this is equivalent to owning the foreign currency. If one has a short futures position, one agrees to deliver foreign currency. Economically, this is the equivalent of having borrowed the currency.
Generally, one may hedge the currency exposure of a foreign stock position by going short a foreign currency futures position.
Trading futures incurs commission costs. One must maintain adequate collateral to avoid margin calls on the future position.
New Post has been published on UNDERVALUED STOCKS
New Post has been published on https://www.undervaluedstocks.info/types-accounts-use-invest-foreign-stocks/
What types of accounts to use to invest in foreign stocks?
You have researched the opportunities for investing in foreign stocks and have decided to move forward. You are excited about finding undervalued stocks in parts of the world that most American investor overlook.
Now the question becomes money: What type of account should you use to fund your investments?
Should you use your personal funds or your funds in your retirement account? If you have a trust account, should you use it to make the investments? What about another structure – perhaps a corporation, a partnership, a limited liability company or something similar?
As one can imagine, the answer depends on your circumstances and what kinds of costs and uncertainty you are willing to accommodate. Most of the challenges relate to taxes and to tax paperwork in particular.
Based on our research, we believe using a personal account to invest in foreign stocks minimizes the tax hassles. If one chooses the countries carefully, the tax compliance obligations could be as little as filing an extra form or two with the Internal Revenue Service.
Trust accounts can be tricky. The basic problem is one of legal status or lack thereof. Many countries are unfamiliar with trusts and have made no accommodation for them in their tax laws. Lack of status can create unpredictable tax results. Specifically, in such countries the foreign tax authorities may assign the trust income to someone other than the trust – perhaps a beneficiary, but maybe not. In addition, the tax paperwork requirements for a foreign trust may be more onerous than for a natural person.
Individual retirement accounts face many of the problems of trusts because … individual retirement accounts are trusts, too. See Section 408(a): of the Internal Revenue Code: “… the term ‘individual retirement account’ means a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries …” [emphasis added]. In addition, foreign governments may or may not recognize the tax deferral features of a U.S. individual retirement account.
Corporations, partnerships, LLCs and similar entities potentially introduce another layer of complexity. You may face additional filing requirements based on the specifics of the structure, perhaps so the foreign governments can track the income of the owners of the entity.
New Post has been published on UNDERVALUED STOCKS
New Post has been published on http://www.undervaluedstocks.info/test/foreign-currency-transactions-exposures/
Foreign currency transactions and exposures
When one starts investing in foreign stocks, one must learn to work with foreign currencies. When one buys a foreign stock, one must have sufficient local currency to settle the trade. U.S. Dollars will not suffice. When one sells a foreign stock, one will receive foreign currency. It is up to the investor to exchange that foreign currency for U.S. Dollars.
Foreign currency is an issue not just in the buying and in the selling of foreign stocks. Let’s imagine that one owns a foreign stock but otherwise owns no foreign currency. One must still think about foreign currency exposure because the foreign stock is priced in the foreign currency. When Japanese stocks trade in Japan, the trading occurs in Yen not Dollars. If the stock does not rise or fall but the currency moves, one’s net worth (expressed in U.S. Dollars) will move solely because of the movement of the currency.
If one opens an account with a brokerage firm like Interactive Brokers, one has three options for managing currency exposure:
Exchange currencies;
Borrow currencies;
Hedge currencies using futures.
Exchange Currencies
One can exchange currencies as part of one’s investment program. This means if one needs Japanese Yen to settle a trade, one sells U.S. Dollars to buy Japanese Yen.
The sale of a Japanese stock will settle in Japanese Yen. If one needs U.S. Dollars, one sells the Japanese Yen to buy the needed U.S. Dollars.
Interactive Brokers charges a commission every time it exchanges currencies. The commission is small.
Borrow Currencies
Companies like Interactive Brokers also provide foreign currency margin loans. Instead of having to convert U.S. Dollars into Japanese Yen in order to settle the purchase of a Japanese stock, one simply borrows as many Yen as one needs to settle the trade. When one sells the stock, the proceeds from the sale (in Japanese Yen) are used to pay down the Japanese Yen margin loan.
Margin loans are a natural currency hedge. One owns a foreign currency asset (the foreign stock) and incurs an offsetting foreign currency liability (the margin loan).
The brokerage firm charges interest on outstanding loan balances. One must maintain sufficient collateral to avoid margin calls.
Hedge Currencies using Futures
One can use futures to hedge currency exposures. When one enters into a futures contract, one agrees to receive or to deliver foreign currency at a specific time in the future.
If one has a long futures position, one agrees to receive the foreign currency. This is equivalent to owning the foreign currency. If one has a short futures position, one agrees to deliver foreign currency. This is the equivalent of having borrowed the currency.
Generally, one may hedge the currency exposure of a foreign stock position by going short a foreign currency futures position.
Trading futures incurs commission costs. One must maintain adequate collateral to avoid margin calls on the future position.
New Post has been published on UNDERVALUED STOCKS
New Post has been published on http://www.undervaluedstocks.info/test/types-accounts-use-invest-foreign-stocks/
What types of accounts to use to invest in foreign stocks?
You have researched the opportunities for investing in foreign stocks and have decided to move forward. You are excited about finding undervalued stocks in parts of the world that most American investor overlook.
Now the question becomes money: What type of account should you use to fund your investments?
Should you use your personal funds or your funds in your retirement account? If you have a trust account, should you use it to make the investments? What about another structure – perhaps a corporation, a partnership, a limited liability company or something similar?
As one can imagine, the answer depends on your circumstances and what kinds of costs and uncertainty you are willing to accommodate. Most of the challenges relate to taxes and to tax paperwork in particular.
Based on our research, we believe using a personal account to invest in foreign stocks minimizes the tax hassles. If one chooses the countries carefully, the tax compliance obligations could be as little as filing an extra form or two with the Internal Revenue Service.
Trust accounts can be tricky. The basic problem is one of legal status or lack thereof. Many countries are unfamiliar with trusts and have made no accommodation for them in their tax laws. Lack of status can create unpredictable tax results. Specifically, in such countries the foreign tax authorities may assign the trust income to someone other than the trust – perhaps a beneficiary, but maybe not. In addition, the tax paperwork requirements for a foreign trust may be more onerous than for a natural person.
Individual retirement accounts face many of the problems of trusts because … individual retirement accounts are trusts, too. See Section 408(a): of the Internal Revenue Code: “… the term ‘individual retirement account’ means a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries …” [emphasis added]. In addition, foreign governments may or may not recognize the tax deferral features of a U.S. individual retirement account.
Corporations, partnerships, LLCs and similar entities potentially introduce another layer of complexity. You may face additional filing requirements based on the specifics of the structure, perhaps so the foreign governments can track the income of the owners of the entity.
New Post has been published on UNDERVALUED STOCKS
New Post has been published on http://www.undervaluedstocks.info/stocks-recommended-past/
Some stocks we have recommended in the past
Normally, we reserve our recommendations for our paid newsletter subscribers and/or our free email list subscribers. We wrote about the following stocks to give “window shoppers” a sense of the ideas we consider:
Nihon Kagaku Sangyo Cooper-Standard Murakami Fukuvi Chemical Industry Nippon Antenna
