The ability to make profits in the stock market depends on the expertise to determine the best forms of stocks to invest in that is the determination of stock prices, interest rates, and time the shares mature. This paper critically analyzes the risks and returns of investing in two markets by addressing the investment instruments in the U.S. and non-U.S. markets. The article discusses the investment instruments and the different manner interest, inflation, and taxation affect the returns on such investments.
Investment Instruments
Investments returns are the gains or losses incurred following investing money in purchasing either stocks, bonds, mutual fund, or exchange-traded fund (ETF). The benefits are achieved through dividends yields, capital gains, prices relative to intrinsic values and foreign exchange considerations. The diversification of investment enhances the ability to diversify the risks to ensure that any investment does not lead to a loss (Deventer, Imai, & Mesler, 2013). Dividends yields are the division of the earnings of a company distributed among the shareholders with some investors preferring to purchase stocks from companies that offer a relatively higher percentage of dividends. The dividends paid annually helps accumulate earnings for the shares for the holders without having to sell their stocks. Capital gains, on the other hand, are earnings from the sale of the stocks.
Delegate your assignment to our experts and they will do the rest.
Lastly, prices relative to intrinsic values depends on disvaluing the shares during buybacks where the company either devalue or overvalues its stocks (Fabozzi, 2015). An investor in the U.S. investing in the domestic market will enjoy these benefits without incurring additional taxes such as stamp duty and transaction taxes. The foreign exchange consideration thus plays a crucial role in investing in two markets such as domestic and international. If the investment in the foreign market offers only a slightly better dividend or capital gains, the investor is more likely to refrain from undertaking such a venture. The investor must consider the additional taxes when investing and while selling the stocks thus making it expensive to enter foreign markets. The investor must determine the indices to determine their allocation for the funds in either local or international stakes.
According to a past illustration, the U.S. forms just 46% of the equity market compared to 54% globally. The decision to invest in such demand determined by the asset-weighted expense ratio with countries in the bid to promote local investments make the market biases towards foreign investments. For instance, the U.S. stake market maintained the allocation of the U.S. stakes to an appropriate 1.8 times the market cap of the U.S stocks whereas the U.K. home bias to about 5.3 times the market cap for her domestic stocks (Philips, 2012). The example demonstrates that the U.S. investors will earn more if they invest domestically compared to spending in the U.K.’s stakes. The investor must determine the most suitable way to spend by determining the percentage to divide the funds in the domestic and foreign markets to gain profits. The determination of the division of money is dependent on interest and inflation, and taxation.
Interest and Inflation
Inflation in the U.S. is too many dollars are chasing too few stocks or goods. It can also be too few dollars targeting too many shares. In the case where too many dollars target few stocks, the interest rates decreases and prices increase to limit the money supply and stabilize the market (Pezzutto, 2008). The increment in price leads to purchase of the stakes using much money and the decreased interest rates ensures holding of the stocks as sales would account for the capital loss. In case there is lower money supply, higher interest rates and low prices of stakes are evident to ensure sales of stocks. The U.S. market is more stable than the non-U.S. market due to fluctuations of the economy.
The different fiscal and monetary strategies utilized by the various governments to restore the market can either support or limit investments. An investor should reduce their risks by investing in markets that are stable to restrict capital loss risks (Pezzutto, 2008). Currency fluctuations due to inflation make it challenging for domestic investors intending to spend in foreign markets. The U.S. dollar is the unit mode of transaction in the international market thus predicting the fluctuation of the foreign currency to the dollar is important, as an appreciation of the dollar would result in losses during foreign exchange transaction.
Taxation
The taxation policies of foreign markets are dependent on the fiscal, monetary, and political factors of a particular company. Some countries have systems limiting foreign investors whereas others promote foreign investments. In the bid to curb external influence in their markets, states increase stamp taxes to ensure that the foreigners do not have an advantage over the locals. Investing in such a market would result in high expenses and fees, which lowers dividend yields and capital gains. Countries focused on enhancing foreign trade reduces taxes or offer subsidiaries thus encouraging foreign investments (Teall, 2012). The U.S. stock market offers an advantage to domestic investors. Therefore, a U.S. investor should invest more in local stakes, choose investments in politically stable countries with stable economies, and encourage foreign investments.
Conclusion
The field of stocks is complicated with inflation, interest rates, and taxation policies affecting the gains. The time taken for the bonds to mature provides different risks due to fluctuations. Short-term stakes are favorable in a fluctuating market whereas long-term stocks or bonds are better as they can sustain their value for a long time due to policies employed by the government to restore the markets. Diversification of stocks in different markets lowers the risks of investments, but the investor must know the division that will result in the highest returns by factoring in all the issues analyzed in this paper.
References
Deventer, D. R., Imai, K., & Mesler, M. (2013). Advanced financial risk management: Tools and techniques for integrated credit risk and interest rate risk management . Singapore: Wiley.
Fabozzi, F. J. (2015). Capital markets: Institutions, instruments, and risk management .
Pezzutto, P. (2008). Trading the US markets: A comprehensive guide to US markets for European traders and investors . Petersfield: Harriman House.
Philips, C. (2012). Considerations for investing in non-U.S. equities . Vanguard research . Retrieved October 10, 2017, from https://personal.vanguard.com/pdf/icriecr.pdf
Teall, J. L. (2012). Financial trading and investing . Waltham, MA: Elsevier.
