How to Trade Foreign Stocks - dummies

By Matt Krantz

Are you ready to add a little international flair to your portfolio? Now’s the time to get the trades done online. There are four main ways to buy foreign stocks:

  • Investing directly through the foreign exchange: If you want, you can instruct your online broker to buy the foreign stock directly from the foreign exchange that particular stock trades on. This might seem like the most direct way to buy non-U.S. stocks, but buying stock directly like this comes with serious headaches, including the need to convert your U.S. dollars into the local currency before the trade.

    Several online brokers, including Fidelity, E*TRADE, and Schwab, offer this service.

  • Buying American Depositary Receipts (ADRs): Most of the larger foreign companies are available to U.S. investors as American Depositary Receipts, or ADRs. ADRs are shares that trade on a major domestic exchange that track the shares trading on the foreign exchange. If you buy an ADR, you indirectly own a share or a portion of a share of the foreign stock trading on the foreign exchange.

  • Buying an international mutual fund: You can buy shares of an actively managed mutual fund run by portfolio managers trying to buy foreign stocks they expect to outperform. Or, you can buy an index mutual fund that mirrors an international stock index, such as the EAFE.

  • Buying an international index exchange-traded fund (ETF): International ETFs are baskets of stocks that track a particular international market index. Many ETFs are available that can track international and emerging markets stocks.

Read on for more detailed explanations of each option.