Offshore Investing Basics, Offshore Account, Asset Protection, offshore merchant account   Offshore Investing Basics, Offshore Account, Asset Protection, offshore merchant account 
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Offshore Investing Basics

Home > Offshore Investing > Offshore Investing Basics

Offshore Investing Basics, Offshore Account, Asset Protection, offshore merchant account
Foreign companies can be spectacular offshore investments particularly in Asia. A bumper crop of companies with low costs and substantial markets has emerged over the past few years. The easiest, safest way to invest in these companies is via a foreign-stock mutual fund. These funds invest solely in overseas companies — and sometimes only in a particular area like Europe or Asia.

Or you can choose to invest in a single company — or a few companies of your choice — with American Depositary Receipts (ADRs). Foreign companies interested in luring U.S. capital deposit a portion of their shares in a U.S. bank, then issue receipts for these shares.

These receipts, better known as ADRs, entitle you to all dividends and capital gains. ADRs are available for hundreds of different stocks and for companies based in many countries. And because they're traded on major U.S. stock exchanges, ADRs are liquid as well.

If you've decided to invest in a foreign-based company that doesn't issue ADRs, the procedure works just like any other brokerage transaction. You deposit funds into your brokerage account and withdraw profits or dividends by instructing your broker to send you a check. You'll still be able to issue buy and sell orders over the phone or via your internet brokerage account.

Investing in stocks and bonds denominated in foreign currencies also can be one more way to diversify your portfolio: Currencies fluctuate relative to each other, and you’re somewhat protected by holding investments in more than one country's legal tender. A straight purchase of foreign currency won't pay dividends. But you can accomplish both objectives — diversification and income — by buying foreign stocks. Gains aren't guaranteed on either count, but you'll have added one more arrow to your investment quiver.

Foreign trading
As an introduction to offshore investing and foreign trading, let's look at procedures in five European countries. Each has different securities laws, and regulations governing investments by foreigners vary as well. For example:
  • France: Foreigners can have fully convertible accounts with authorized brokers. These accounts permit you to buy and sell any securities traded on the Paris "Bourse" or stock exchange.

  • Germany: You can buy and sell any German security, except money-market instruments and bonds with maturities of less than four years. Many mark-denominated securities can be purchased through German banks, which act as brokers, at commission rates substantially below those of their U.S. counterparts,

  • Switzerland: You can buy only bearer shares, which carry inferior voting rights or none at all. But voting rights probably aren't important to you, and for purposes of dividends and capital appreciation, your shares are as good as those held by Swiss nationals.

  • United Kingdom: Nonresidents may purchase and sell all sterling-denominated securities, and since the opening of the London Stock Exchange to foreign securities dealers in 1986, the venerable exchange is becoming an even more active market.

  • Italy: Foreigners can buy and sell securities freely, but transactions must be made through Italian banks. This effectively doubles your commissions.

Finding information
If you understand a foreign language, you can follow economic and business trends by reading foreign newspapers (available at larger newsstands in major cities). Assuming you won't speak all the languages of the countries in which you hope to invest, however, major U.S. brokers generally can put you in touch with reputable brokers abroad.

Or you can open an account with a Swiss bank in the United States. Your Swiss representative can guide your foreign investments, and you'll find commission rates pleasantly low — generally less than half what you'd pay a U.S. broker. However, Swiss banks will charge you for every service they perform, and interest on savings probably will be substan­tially lower than rates at U.S. institutions. Costs can mount quickly, although the institution may give you a discount if you're investing large sums.

You also can open foreign accounts directly. If you travel abroad — to London, for instance — you may want to drop in on a British brokerage and open an account. You can ask the customer-service representative for investment recommendations and arrange to be put on the firm's mailing list. The brokerage house will begin sending you a summary of the market outlook, economic events and selected buy/sell recommendations. You may learn a great deal simply by scanning these summaries. And if you won't be traveling soon, you can write to brokerages and ask to be put on their mailing lists anyway.

Keep in mind that all foreign-source income is taxable to you on your federal tax returns. If the total value of assets held abroad exceeds $10,000, you will be required to report such holdings annually to the U.S. Treasury Department.

The effect of currency fluctuations
With foreign securities, remember you're carrying a currency risk along with your usual investment risk. While you're protecting a portion of your capital should the dollar fall relative to other currencies, you can also lose if the dollar climbs against the pound or mark. Here's a tip that may help you make currency-related decisions:

One currency depreciates against another at a rate generally equivalent to the difference in the inflation rates of the two countries, For example, if the U.S. inflation rate is 6 percent, the German rate is 4 percent and the Swiss rate is 2 percent, the German mark will appreciate against the dollar at 2 percent per year. The Swiss franc will gain approx­imately 4 percent each year. Bear in mind, though, that these are long-term trends, and don't reflect normal value fluctuations.

Foreign financial statements
Balance sheets and income statements also vary from one country to another. Accounting principles may vary significantly among countries and may lead to the availability of substantially different financial information. Great Britain and other Common Market countries are establishing international reporting standards, which may lead to a certain degree of standardization. Consult your broker or the representative of a brokerage doing business in the country of your interest to explain differences in reporting standards.

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