Know What You are Getting
This past semester, I have read a bit about investing abroad. My readings have caused me to ask the following questions:
Who owns the shares?
The phrase “publicly-owned” does not mean the same thing for every company. Who owns the shares? Are the mostly owned by the founders, a handful of institutional investors, or by individuals in the public? If the majority of the company is owned by a small number of individuals, and particularly, if those individuals have aligned interests that are different from those of the individual public shareholders with small stakes, it may be worth reconsidering investing in the company.
What parts of the company are being traded?
Although this is not as big a concern for investors purchasing shares of American companies, it is definitely a concern for those purchasing shares of foreign companies. For instance, Samsung is a Korean chaebol that has finance, automotive, electronics, and other divisions. A share of Samsung Electronics only is an investment in the electronics division, not the overall performance of the firm.
How many classes of shareholders are there?
In China, there are multiple classes of shareholders with different rights:
- A shares are only traded in Mainland China, and are denominated in Renminbi. Only Mainland Chinese and some foreign institutional investors may own them.
- B shares are traded in Shanghai and Shenzhen, and historically been only available to foreigners. As they were originally designed for foreigners, they are denominated in U.S. Dollars in Shanghai and Hong Kong Dollars in Shenzhen. In 2001, B shares became available to domestic Chinese.
- H shares are shares of Mainland Chinese companies traded on the Hong Kong Exchange.
Each of these classes of shares often is priced at a different price.
How does government regulation affect the company’s operations?
In some countries, the government plays a role in selecting corporate leaders. Likewise, in some countries, it is routine for corporate leaders to hold government offices. Before investing, be sure to ask yourself whether any such entanglements exist, and if so, whether they are likely to positively or negatively affect performance.
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You have written some very interesting thoughts. I belong to India. In this country, I feel high level of holding of founders usually has a positive impact on stock prices. High level of founder holding means that any increase in market capitalization of company will lead to increase in wealth of founders as well. This fact probably motivates the founders to do all the ‘right’ things, which help stock prices to move upward.
International investing carries with it a higher risk than domestic investing:
– Starting with the trading hours (you cannot react in real-time to changes on the trading floor)
– You are not aware of the micro and macro economics of each country you might want to invest in; nor to the mentality of investors in each of these countries
– The ‘developing markets’ (BRIC)are more prone (and sensitive) to massive amounts of cash flowing in or out of the country.
Investing in a foreign stock is, inherently, more risky than investing in the market index (using an ETF, fund, or similar). Don’t you think ‘private’ (as opposed to insitutional) investors should stick to these?