Individual International Trade Operations - Essay Example

? Individual 3 International Trade Operations International Trade Operations International trade operations entailsrules, regulations, policies, documents and procedures that should be adhered when participating in trading of goods and service from one nation to another in international borders. There are numerous benefits that can be obtained by Mr. Swanson if he invests in the International market. Among the benefits include: broader market for his products, increase profitability for his business, higher technological exchange, increase in trade efficiency as well as increase in sales volume to mention just but a few of the benefits that can be obtained by Mr. Samson. However, when investing in the international market, Mr. Samson should be prepared to deals with challenge of stiff competition from the international firms (Choudhury, 2012). Therefore, this study will provide an insight of various elements that Mr. Swanson should take into consideration when investing in the international markets. What is portfolio diversification? Explain why are foreign investments effective at diversifying a portfolio? Portfolio diversification entails hedging risk by investing in various assets/portfolios. This means that a diversified portfolio will expose an investor to less risk as compared to a single investment. For example, if one investment is performing poorly in the market the other one might be performing well hence, distributing risk unlike in a situation where one has invested in single portfolio. Therefore, investors are strongly urged to invest wisely by diversifying their portfolio (Hagin, 2004). In above connection, foreign investments have been reported to be effective at diversifying a portfolio due to the following reasons. There is well advanced level of information technology that enables investors to track their investments and market trends as well as promotion of idea exchange. International market tends eradicate foreign exchange controls and hence making it quit effective to diversify portfolio, higher growth and proper flow of international capital makes it effective to diversify portfolio in the international market. Development of both multinational and global companies had made it easier and effective to diversify a portfolio in the international market. Trade deregulation in the international market has made it effective for portfolio diversification within the international market (Yavas, 2007). What are the main reasons to invest in international markets? Explain. The main reasons to invest in international market include: risk reduction. For example, if one has investments in Japan and the other one in the U.S, economic down town in U.S may only affect an investment that is in the U.S but not the one in Japan. This means that investing in the international market prevent one from incurring greater risk. Secondly, international markets provide an investor with greater investment opportunities. For example, international market provides investors with an opportunity to trade stocks with higher value as compared to those offered in the domestic market and hence, providing an investor with higher returns (Gibley, 2012). Thirdly, an international market has higher growth potential as compared to domestic market. This provides an investor with an opportunity to take advantage of potential growth in the foreign markets. Fourthly, International Markets provides an investor with an added advantage because international companies can help to boost returns especially when there is fluctuation of domestic currencies. For example, an international investor may obtain more returns when there is a decline in the value of dollar while on the contrary a domestic investor may obtain losses. Therefore, the above benefits can lead an investor to venture in international market (Gibley, 2012). What are the major risks associated with investing internationally? There are three most common risks that may be experienced when investing in the international market. Among that risk include: political risk, currency risk and credit/economic risk. Political risk is an investments risk that is attributed to political instability such as terrorism attacks, ethnic wars among others. This risk may cause the value of investments to decline because investors tend to fear losing their investments. Currency risk involves an investments risk that may occur due to fluctuation of currencies among the trading partners. Such fluctuations may lead to substantial gains or losses to the investors’ especially. For example, the currency of value of one country might be lower as compared to others. This may expose investors to substantial losses during trading. On the contrary, credit/economic risk is also associated with international investments. For example, a company that is participating in the international trade may be affected negatively if there is an adverse economic occurrence its host country (Gibley, 2012). In above connection, other risk that could be experienced while investing in the international market include: information risk, high cost risk, volatility risk. Information risk entails lack of correct information at the right time regarding ones investments may cause the company to incur losses. Higher Cost risk entails additional cost that an international investor may incur when investing in the international market. Among those costs include: currency conversion fees, transaction fee, commission fee and stamp duty fee. Finally, an international investor may experience volatility risk attributed to returns because international market are highly volatile and less liquid due to the few numbers of stocks that exchange hands s (Gibley,2012). What are the various methods for investing in an international market? There are numerous methods for investing in an international market. Among those methods include: exchange trade funds investing, direct purchase of foreign stocks, international mutual funds investing, American depository receipt and multinational companies investing. The Exchange trade funds investing is an investment method that provides investors with an opportunity of investing directly in a stock index representing any given country? This method has emerged as one of the most recent innovations in the international market because initially, stock indexes were not utilized for investment but rather were used as a benchmark for measuring performance in the stock market. The second method entails direct purchase of stock. This method involves purchasing of foreign stocks that are listed in the domestic market. In addition, these methods requires the assistance of brokerage who contacts the foreign exchange markets and inform them about the investors interest in buying stocks through their market. However, this method tends to be faced by numerous challenges such as; higher transaction cost, discrepancies in tax differentials and lack of adequate information among investors in the domestic and international markets (Christy, 2013). The third method entails international mutual funds investing. An international mutual fund involves a combination of shares from different countries. Whereby, investors purchase a portfolio of those shares from the international market. The fourth method of investing in the international market involves American depository receipts (ADR’S) method. This method involves purchasing of certificates representing foreign stocks ownership. This method has been reported to be very effective in exchanging direct foreign investments. However, there are limited numbers of American Depository Receipts. The fifth method of investing in the international market refers to multinational companies investing. Whereby, investors who tend to fear the risk of investing in the international market may buy shares of American companies that have a higher percentage of profits and sales in the international market (Christy, 2013). Conclusion An international trade operation involves rules, regulations, policies and procedures that should be followed when participating in the international trade. On the contrary, Portfolio diversification entails hedging risk by investing in various assets/portfolios. In addition, foreign investments are effective in portfolio diversification because there is well advanced level of information technology that enables investors to track their investments, proper eradication foreign exchange controls, higher growth, and free flow of international capital makes and development of both multinational and global companies. The main reasons to invest in international markets have also been discussed as well as risks that may accrue as a result of investing internationally. Conclusively, the various methods of investing in an international market have been put forth. Among those methods include: exchange trade funds investments, direct purchase of foreign stocks, international mutual funds investments, American depository receipt and multinational companies investments methods. References Choudhury, B. (2012). Public services and international trade liberalization: Human rights and gender implications. Cambridge [UK: Cambridge University Press. Christy.J.(2013).The Best Way to Invest in the International Market. Retrieved< http://internationalinvest.about.com/od/gettingstarted/tp/bestways.htm > on 27th November 2013. Gibley.M. (2012 July, 24).Why Invest in the International Market. Retrieved :< http://www.schwab.com/public/schwab/resource_center/expert_insight/investing_strategies/international/why_invest_internationally.html > on 27th November 2013. Hagin, R. L. (2004). Investment Management: Portfolio Diversification, Risk, and Timing--Fact and Fiction. Hoboken: John Wiley & Sons. Yavas.F.B. (2007).Benefits of International Trade Diversification.. Read More