Portfolio Building · Stocks Explained
Identify what you actually own
An investor may buy shares on a foreign exchange, a depositary receipt in another market or a fund holding international stocks. Each structure has its own fees, rights, liquidity and operational arrangements. A familiar trading currency does not remove the underlying business risks.
Check the issuer, instrument, exchange, currency and any receipt ratio. Review custody, settlement and reporting arrangements through the relevant broker and official disclosures.
Separate business exposure from quote currency
A company listed in one country can earn most of its revenue elsewhere. Listing location and trading currency do not fully describe economic exposure. Costs, borrowing and customer demand can each be in different currencies.
For an unhedged investment, a home currency return combines the local investment return and the currency movement. Use a consistent exchange rate convention before calculating the effect.
Calculate the combined return
Suppose a foreign share rises 10% in its local currency. Over the same period that currency loses 8% against the investor’s home currency. Ignoring fees, taxes and dividends, the home currency growth factor is 1.10 times 0.92, or 1.012. The return is 1.2%.
Simply subtracting 8% from 10% gives only an approximation. If the currency instead appreciates 8%, the combined return becomes 18.8%. Currency hedging can change this exposure and adds its own costs and limitations.
Compare access routes
A diversified fund can simplify access to many markets, but inspect concentration, expenses, tracking approach and holdings. Deposit receipts can carry custody fees and may differ in voting arrangements. Direct shares can involve conversion charges and unfamiliar market conventions.
Political, legal, disclosure and trading risks differ between markets. Dividend withholding and other tax treatment depend on the investor and jurisdiction. Compare total costs and the exposure received, not just the quoted commission.
Try it yourself
A local stock return is 5% and its currency appreciates 4% against the investor’s home currency. What is the combined return before costs?
Show the worked answer
Multiply 1.05 by 1.04 to obtain 1.092. The combined return is 9.2%. This assumes an unhedged holding and ignores dividends, taxes and transaction costs.
Further reading
Educational material. Examples are hypothetical and do not recommend a security or a personal allocation.
