Taking your first step into global stocks can feel overwhelming. With so many investment options available, it’s not surprising that new investors often feel unsure of where to begin. And with good reason: if not done correctly, investing in global stocks can be very expensive. But don’t worry, we’ve got you covered. In this article, we’ll break down what global stocks are, explain common stock market terms, and share tips on how to start investing in the international market.
What are Global Stocks?
The global stock market, also known as international stocks, connects investors with companies from around the world. It allows individuals to buy and sell shares (ownership units) in these companies, offering investment opportunities beyond their own country. For example, if you're a huge fan of Apple, the global stock market lets you invest in them even though you're not from the US.
Similar to the local stock market, global stock prices can be affected by various factors beyond the company's performance, including currency fluctuations, economic conditions in the foreign country, and global political events.
Why You Should Start Investing in Global Stocks
Diversification
Ever heard the phrase “don’t put all your eggs in one basket”? As an investor, diversifying your portfolio is a simple and healthy investment practice. Spreading your investments across different countries can help reduce risk. When a particular market or sector performs poorly, your overall portfolio might be cushioned by positive performance in other regions.
Growth Potential
The biggest appeal of venturing into the foreign market is its growth potential. For example, if you compare Malaysia's projected GDP growth of around 3.8%, emerging economies like China (8.1%) and India (7.2%) are expected to experience significantly faster growth, according to the IMF. These markets are driven by young populations and booming tech & manufacturing sectors. While riskier, a small allocation to these markets through ETFs can diversify your portfolio and unlock higher growth potential.
Better Exposure
Investing in the global market gives you access to companies that might not be available in your local market. You can invest in innovative or leading companies in specific industries that might not have a local presence. This can help hedge against potential risks in your local economy, such as political instability or currency devaluation.
Currency Appreciation
If you invest in a company whose stock price rises and the foreign currency strengthens against your own, you could benefit from a double advantage. For example, if a Malaysian investor buys shares in a Singaporean company and the company’s stock price rises while the Singapore dollar (SGD) strengthens against the Malaysian ringgit (MYR), the investor would gain a double advantage.
In the right market conditions, investing in global markets is a great way to diversify your investment portfolio and maximize your profits.
Considerations When Investing in the Global Market
As you know, in every investment transaction, there is a risk you need to be aware of:
Market Volatility
Investments in the global market exposes you to added volatility influenced by geopolitical events and currency depreciation. This could lead to potential losses, which is why understanding your financial goals, risk tolerance, and investment horizon is important.
Global Transaction Fees
The most significant barrier to investing in global stocks is the added transaction cost, which varies depending on the foreign market you want to invest in. For example, IBKR offers the lowest brokerage fees, across 150+ countries, which is cost-effective for investors.
There may be additional costs like FX conversion charges, transfer fees, and annual maintenance fees that you should know about on top of the brokerage commissions, so it’s always important to do your homework before you settle on a broker you can trust.
Tips for Getting Started in the Global Stock Market
1. Understand Your Investment Goals and Risk Tolerance
Keep in mind that investing comes with unpredictable risks. Before investing, take a moment to understand your financial goals and your risk appetite. This can provide you with a clear roadmap for your investment journey and guide your investment decisions.
2. Plan Your Investment Strategy
Next, plan your investment strategy based on your personality, discipline, and risk tolerance. This strategy will guide your decisions about when to buy or sell.
If you want to test your strategy without losing any money, use a paper trading feature. Paper trading is a simulated experience where you can practice buying and selling investments using fake money. This will help you get comfortable with investing, test your strategy, and learn from mistakes without any real financial loss.
3. Diversification is Key
A well-diversified portfolio can help you maximize your expected returns without taking on unnecessary or unwanted risk. Spread your investments across different assets (stocks, bonds, etc.) to minimize risk. As a beginner, start small with foreign stocks. Consider Exchange Traded Funds (ETFs) that focus on emerging markets - they offer instant diversification across many companies in one purchase.
Bonus Tip: Dollar-cost averaging helps you buy more shares when prices are low and fewer when they're high. Invest a set amount regularly, regardless of the price, to smooth out market fluctuations.
4. Choose a Cost-effective Broker
To buy global stocks in Malaysia, you need to find a stock broker that offers international trading. There are plenty of brokers on the market, but choosing the right investment broker is crucial for beginner investors when starting their investment journey. Factors such as margin fees and conversion rates are important to consider, as they can directly impact your investment costs and returns.
Tip: Always choose a broker with transparent and competitive pricing and low currency conversion rates to minimize investment costs and maximize your gains.
Interactive Brokers (IBKR) offers you the freedom to trade with low brokerage fees, no hidden charges, and no minimum deposit amount. This means that even if you leave your deposit in your account for more than 6 months, you won’t be charged for inactivity.
After completing the necessary account opening procedures, you can fund your account and start trading.
5. Avoid Chasing Trends
Next, decide which stocks to trade. Look for stocks that have the potential for big profits. It's essential to research and understand how stocks perform.
Tip: Don't chase trends. Avoid chasing "hot stocks" based on hype or speculation. Focus on companies with a solid track record, strong fundamentals, and long-term growth potential.
6. Regularly Monitor and Review
Investing isn’t a 'set it and forget it' deal. Keep an eye on your investments to make sure they still align with your goals and risk tolerance. Watch market trends and adjust your investments as needed to stay on track with your financial goals.
Back to Basics for Getting You Started
Understanding basic stock market terms is essential for anyone looking to start investing. Here’s a list of 15 key terms that every budding investor should know.
General Terms
Stock
Definition: A stock represents ownership in a company.
If you buy shares of Apple Inc., you become a part-owner of the company.
Dividend
Definition: A dividend is a payment made by a company to its shareholders, usually from its profits
Example: If you own 100 shares of a company that pays an annual dividend of $2 per share, you will receive $200 in dividends each year.
Market Capitalization
Definition: The total value of a company’s outstanding shares of stock.
Example: If a company has 1 million shares outstanding and the stock price is $50, the market capitalization is $50 million.
Portfolio
Definition: A collection of investments owned by an individual or institution.
Example: Your portfolio might include stocks, bonds, and mutual funds.
Market Trends
Bull Market
Definition: A period when stock prices are rising or are expected to rise.
Example: The stock market experienced a bull market from 2009 to 2020, with many stocks reaching record highs.
Bear Market
Definition: A period when stock prices are falling or are expected to fall.
Example: The stock market entered a bear market in early 2020 due to the COVID-19 pandemic, causing prices to drop significantly.
Rally
Definition: A period during which the price of stocks or bonds increases continuously.
Example: The stock market experienced a rally after the announcement of the new economic stimulus package.
Correction
Definition: A decline of 10% or more in the price of a security or market index from its most recent peak.
Example: If a stock falls from $100 to $90, it is undergoing a correction.
Investment Strategies
Day Trading
Definition: Buying and selling stocks within the same trading day to take advantage of short-term market movements.
Example: A day trader might buy shares of a tech company in the morning and sell them in the afternoon if the price goes up.
Short Selling
Definition: When an investor borrows shares and sells them, hoping to buy them back at a lower price.
Example: If you short sell 100 shares of a stock at $10 each and the price drops to $8, you can buy them back at the lower price and make a profit.
Hedge
Definition: An investment made to reduce the risk of adverse price movements in an asset.
Example: Buying gold can be a hedge against inflation since gold often retains its value when currency value drops.
Arbitrage
Definition: Buying and selling an asset in different markets to take advantage of differing prices for the same asset.
Example: If a stock is trading at $100 on the New York Stock Exchange and $102 on the London Stock Exchange, an arbitrageur would buy the stock in New York and sell it in London.
Investment Instruments
ETF (Exchange-Traded Fund)
Definition: A type of investment fund that is traded on stock exchanges, much like stocks.
Example: SPDR S&P 500 ETF (SPY) is an ETF that tracks the performance of the S&P 500 index.
Bond
Definition: A fixed income instrument representing a loan made by an investor to a borrower.
Example: When you buy a U.S. Treasury bond, you are lending money to the U.S. government.
Mutual Fund
Definition: A mutual fund pools money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities.
Example: Vanguard 500 Index Fund is a popular mutual fund that tracks the S&P 500 index.
Conclusion
Investing in global stocks offers a wealth of opportunities for diversifying your portfolio and potentially boosting your returns. With the right approach, you can make the most of the global stock market and achieve your financial goals. Happy investing!
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