Many investors place a portion of their portfolios in foreign securities. However, investors often neglect an important first step in the process of international investing. Country risk refers to the economic, political and business risks that are unique to a specific country, and that might result in unexpected investment losses.
Whenever investors buy securities that offer a fixed rate of return, they are exposing themselves to interest rate risk. This is true for bonds and also for preferred stocks. The following article, Forces Behind Interest Rateswill deepen your understanding of the importance of interest rates and what makes them change.
Furthermore, understand the various factors that influence interest rates, so that you can learn to anticipate their movements for your benefit in the article, Trying to Predict Interest Rates.
Business Risk Business risk is the measure of risk associated with a particular security. It is also known as unsystematic risk and refers to the risk associated with a specific issuer of a security.
Generally speaking, all businesses in Risks and rewards investment in a new country same industry have similar types of business risk. But used more specifically, business risk refers to the possibility that the issuer of a stock or a bond may go bankrupt or be unable to pay the interest or principal in the case of bonds.
A common way to avoid unsystematic risk is to diversify - that is, to buy mutual funds, which hold the securities of many different companies.
Typically, the higher the credit risk, the higher the interest rate on the bond. Taxability Risk This applies to municipal bond offerings, and refers to the risk that a security that was issued with tax-exempt status could potentially lose that status prior to maturity.
Since municipal bonds carry a lower interest rate than fully taxable bonds, the bond holders would end up with a lower after-tax yield than originally planned.
|Investing in a country-specific fund – the risks and rewards | Money Observer||All investments carry some degree of risk. Stocks, bonds, mutual funds and exchange-traded funds can lose value, even all their value, if market conditions sour.|
|SitNews: Column: INVESTING GLOBALLY: RISKS AND REWARDS By MARY LYNNE DAHL, CFP®||Search Investing in a country-specific fund — the risks and rewards Tom Bailey considers what investors need to look out for in emerging and frontier market funds that invest in one country — and how to ride out the expected volatility.|
|The Reality of Investment Risk | caninariojana.com||You may think that investing in the stocks and bonds of another country is extremely risky and limit your investments to the US as a result, but if you do that, you are overlooking the fact that when compared with the EU, Asia and the rest of the world, the US market is no longer the biggest market on earth.|
Call Risk Call risk is specific to bond issues and refers to the possibility that a debt security will be called prior to maturity. Call risk usually goes hand in hand with reinvestment risk, discussed below, because the bondholder must find an investment that provides the same level of income for equal risk.
Call risk is most prevalent when interest rates are falling, as companies trying to save money will usually redeem bond issues with higher coupons and replace them on the bond market with issues with lower interest rates. In a declining interest rate environment, the investor is usually forced to take on more risk in order to replace the same income stream.
Inflationary Risk Also known as purchasing power risk, inflationary risk is the chance that the value of an asset or income will be eroded as inflation shrinks the value of a country's currency. Put another way, it is the risk that future inflation will cause the purchasing power of cash flow from an investment to decline.
The best way to fight this type of risk is through appreciable investments, such as stocks or convertible bonds, which have a growth component that stays ahead of inflation over the long term.
Liquidity Risk Liquidity risk refers to the possibility that an investor may not be able to buy or sell an investment as and when desired or in sufficient quantities because opportunities are limited. A good example of liquidity risk is selling real estate.
In most cases, it will be difficult to sell a property at any given moment should the need arise, unlike government securities or blue chip stocks. Market Risk Market risk, also called systematic riskis a risk that will affect all securities in the same manner.
In other words, it is caused by some factor that cannot be controlled by diversification. This is an important point to consider when you are recommending mutual funds, which are appealing to investors in large part because they are a quick way to diversify. You must always ask yourself what kind of diversification your client needs.
Reinvestment Risk In a declining interest rate environment, bondholders who have bonds coming due or being called face the difficult task of investing the proceeds in bond issues with equal or greater interest rates than the redeemed bonds.
As a result, they are often forced to purchase securities that do not provide the same level of income, unless they take on more credit or market risk and buy bonds with lower credit ratings. This situation is known as reinvestment risk: Congress has the power to change laws affecting securities, any ruling that results in adverse consequences is also known as legislative risk.
American investors will need to convert any profits from foreign assets into U. If the dollar is strong, the value of a foreign stock or bond purchased on a foreign exchange will decline. This risk is particularly augmented if the currency of one particular country drops significantly and all of one's investments are in that country's foreign assets.
If the dollar is weak, however, the value of the American investor's foreign assets will rise. Understandably, currency risk is greater for shorter term investments, which do not have time to level off like longer term foreign investments.Evaluating country risk for international investing political and business risks that are unique to a specific country, and that might result in unexpected investment losses.
This article will. Mar 30, · Jens Ehrhardt, chief executive of DJE Group, an independent investment management company in Munich, said he believed Germany was currently home to some of . If you are investing in a country or region where the dissemination of information is curtailed by a political, military, or cultural leader, you may want to proceed with caution.
Currency / liquidity risk. Investing in a country-specific fund – the risks and rewards. Aberdeen New Thai investment trust, per cent. What to watch out for. Investing in a single-country fund or trust requires that investors take into account country-specific risks. One of the biggest potential issues in this regard is currency risk.
For example, your investment value might rise or fall because of market conditions (market risk). Corporate decisions, such as whether to expand into a new area of business or merge with another company, can affect the value of your investments (business risk).
This risk is particularly augmented if the currency of one particular country drops significantly and all of one's investments are in that country's foreign assets. Investing in a single-country fund or trust requires that investors take into account country-specific risks. One of the biggest potential issues in this regard is currency risk. As the past few months have shown once again, emerging market currencies can be very volatile. Owning an Amazon delivery business: The risks, rewards and economic realities of the tech giant’s new program for entrepreneurs by Todd Bishop on July 15, at pm July 16, at am.
Some of these risks are not limited to global investment; they are customary risks in any country. If you believe that you need the additional diversification that global investing provides, you should understand the risks and rewards.