The risks and rewards of overseas investing

NYSE at the start of the 2007 trading year. Day trading is seeing a comeback.

KAI RYSSDAL: We've talked some on the program about overseas markets. And the upshot's been that investing in foreign companies isn't so simple. But it can be as easy as a couple of keystrokes. E*Trade, the online discounter, unveiled a new feature this week to let consumers buy or sell foreign stock on the web. We've got Patrick O'Shaughnessy on the line to explain, he's with Morningstar.com. And Patrick, what kind of investor you think might be interested in this?

PATRICK O'SHAUGHNESSY: I think you're looking at some pretty sophisticated investors who are interested in this type of service. These are gonna be investors who have invested internationally in things like ETFs and international mutual funds in the past. And they might have their eye on some international stocks that they currently are not able to trade in. And this E*Trade service is really going to appeal to them.

RYSSDAL: Is this riskier than just buying a share of the Acme Widget company on the New York Stock Exchange?

O'SHAUGHNESSY: You know what, it really depends on the given stock. There're certainly going to be companies over in continental Europe that are gonna be having the same risk, or even a lower risk, than some companies in the U.S. But on the other hand, if you're looking to invest in a small Chinese start-up, for example, it might be much riskier. So it really depends on a case-by-case basis.

RYSSDAL: If I want to be a share of British Airways, I can go to Wall Street and buy what's called an ADR, right -- an American Depositary Receipt -- and I can buy a share in a foreign company that way already, right?

O'SHAUGHNESSY: That's correct. But, the only limitation of that is that not that many companies have ADRs listed. There are certainly lots of companies that are listed only in Europe, or only in Asia right now. And you can not currently exchange them on the U.S. exchange.

RYSSDAL: What do I need to be on the lookout for, though, if I'm an E*Trade client and I want to take advantage of this? What are some of the downsides?

O'SHAUGHNESSY: Some of the downsides are the same that you would have investing in U.S. stocks. So you need to make sure that you've done your research in the stock. You're not just going after the big name with the momentum behind it. You also need to kind of have an understanding of what some of the exchange rate risks might be. So if you are gonna invest in a British company, you have to know that if the British pound appreciates against the dollar, then that'll have an upside for you. But, you know, there could be the downside risk if the British pound depreciates. So, just different things to be aware of than just investing in U.S. stocks alone.

RYSSDAL: Yeah, that sorta gets back to your first point of this is really sort of only for sophisticated investors.

O'SHAUGHNESSY: It certainly is. This is for investors who are kind of on the cutting edge. People who are willing to do the research that it's going to take to justify the stock purchase.

RYSSDAL: How do you do that research on foreign companies though? I mean, I suppose you can go to, I don't know, Morningstar, places like that. But it's tough enough to find research on American companies unless you really know where you're looking.

O'SHAUGHNESSY: Yeah, it certainly is. Morningstar is a great place for people to start. And the Internet also would be a great place to look. There's so much information just on companies' websites and competitors' websites. At the end of the day though, you're right -- there still isn't quite as much as you're gonna have on a lot of U.S. stocks.

RYSSDAL: What might some of the relative costs and benefits be of investing directly in a foreign stock versus buying some kind of foreign mutual fund? I mean that's another way to do the same . . . effectively the same thing.

O'SHAUGHNESSY: Sure. Mutual funds give you a lot more diversification. They are probably gonna lower your risk, depending on the mutual fund. The downside is that you're gonna have to pay the management fee on that mutual fund, and international funds typically have slightly higher management fees than U.S. funds. On the flip side, your return potential's probably greater if you just buy the individual stock. But then again, you're gonna be facing higher risk.

RYSSDAL: All right. Patrick O'Shaughnessy's an equity analyst at Morningstar. Patrick, thank you.

O'SHAUGHNESSY: Thank you very much.

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