The result of the research shows that Ethiopia should pave the way for secondary markets development

in the medium term as their benefits exceed costs. The study concludes that the policymakers must
seriously consider the launching of secondary market in Ethiopia.( ESTABLISHING SECONDARY MARKET
IN ETHIOPIA: BENEFITS AND COSTS STUDY

Kannan, A S; Ejigu, Letenah. Indian Journal of Commerce and Management Studies; Nasik Vol. 4, Iss. 1,
(Jan 2013): 8-12.)

Primary markets and secondary markets: Two important cogs in the wheel of capitalism

Buy and sell—not necessarily at bargain prices.

Written byAnn C. Logue

Fact-checked byThe Editors of Encyclopaedia Britannica

The financial markets also have primary and secondary markets. The primary market is where new
securities are issued, with the issuing companies and governments selling to financial intermediaries
such as broker-dealers or directly to investors. After that first issuance, wherever the security (a bond or
a share of stock, for example) changes hands, it does so in a secondary market such as an exchange.

In the securities industry, the primary and secondary markets have different, important functions.
Understanding these will give you a better understanding of how the markets work.

Key Points

The primary market is where governments and businesses offer new securities for the first time.

After securities have been issued, buyers and sellers trade them in secondary markets such as
exchanges.

Both markets serve important roles in the price discovery process and are essential for the proper
functioning of capital markets.

Primary markets

The primary market is where new securities are issued for the first time. It’s the initial step in raising
capital for corporations, governments, or other entities. The issuers exchange public securities for
money from investors. The exact process varies with the type of security and the issuer’s preferences,
but it usually follows one of the following models:
Initial public offering (IPO). When privately held companies go public, they frequently choose to offer
their shares to the public for the first time through an IPO. The company files a prospectus with their
nation’s securities regulator (in the U.S., that’s the Securities and Exchange Commission or SEC) to which
investors can refer for more information. Corporate bonds may be issued through a similar process.

Auction. U.S. government bonds are sold at auction. A handful of financial institutions, known as primary
dealers, submit competitive bids for bonds they wish to purchase and the rate they will accept. Most
participants are noncompetitive bidders, meaning that they agree to accept the rate determined by the
competitive process.

Direct listing. In contrast to an IPO, a direct listing (called a direct public offering or DPO) allows a
company’s existing shares to be traded on an exchange without issuing new shares. Companies
sometimes go this route after several rounds of private funding through venture capital and private
equity investors. (Sometimes founders, venture capital firms, and/or private equity investors trade their
ownership interest among each other without listing in the public market. These transactions are known
as private equity secondaries.)

Private placement. In a private placement, a company issues stock or bonds to a small group of investors
without going through the rigors of a public listing. Private placement investors are typically of the
“institutional” variety—pension funds, endowments, and high-net-worth investors.

Initial coin offerings. In the cryptocurrency universe, an initial coin offering, or ICO, is an unregulated
offering in which investors receive crypto coins or tokens in exchange for cash or other crypto assets.
The coins represent ownership—and perhaps voting rights—similar to shares of stock.

Secondary markets

After securities are issued and stock listings are created, the new stocks and bonds trade on the
secondary market. Even bank loans and investment products can be traded. For example, the secondary
mortgage market is robust. You can also purchase certificates of deposit (CDs) on a secondary market—
just search any brokerage site for “brokered CDs.”

When you buy or sell a security on the secondary market, the trade is actually matched on an execution
venue such as an exchange or OTC venue. But individual investors don’t typically connect directly to the
execution venue; we work with a broker. Before electronic markets, this meant calling your broker or
visiting the brokerage office, making a plan, and waiting hours or even days for the broker to execute
the trade on the exchange. Nowadays, you can buy and sell securities—often commission free—through
an online brokerage platform or mobile app.
How the primary and secondary markets work together

In finance, the secondary markets are generally more active than the primary markets. That’s because
securities are fungible, meaning that one is as good as another. Two shares of IBM stock are the same,
no matter who owned them last or when they were issued to the public.

Two secondhand Gap sweaters, in contrast, may have received very different care and thus have very
different values. They may be of different styles, sold to the public at different times. Thrift shops,
meanwhile, must compete with the Gap store, which may even have competitive prices on new items,
particularly come clearance time.

In the financial markets, secondary markets allow securities to trade long after the initial issuer receives
funds. This robust market offers liquidity while helping assure issuers that there will be buyers the next
time they come to the primary market.

The bottom line

Primary and secondary markets—and all markets, really—help people and entities set prices for stocks,
sweaters, and all assets in between. Together, primary and secondary markets serve an important role
in the price discovery process, and are essential for the proper functioning of capital markets.

Investing

Retail forex trading: An introduction for active investors

The global currency market at your doorstep.

Written byKarl Montevirgen

Fact-checked byThe Editors of Encyclopaedia Britannica

Flags from several nations and a trading app on a smartphone.

A market as complex as the world economy.

© Sergey Ryzhov/stock.adobe.com, © Jose Calsina/stock.adobe.com; Photo composite Encyclopædia

Britannica, Inc.

If you’re looking to diversify your portfolio by trading international currencies, the retail foreign
exchange (forex) market can provide an alternative assets route to accomplish this.
Forex is an exciting market. But it isn’t an easy one to learn or to trade. In a way, it’s still a specialist’s
market. If you want to be one of the more successful speculators in this market, you have to know what
you’re doing.

The forex market offers an exciting but complex avenue for portfolio diversification.

Forex trading differs significantly from stock trading in terms of valuation, payments, and trading hours.

There are other ways to trade currencies, including ETFs and futures.

What is the foreign exchange market?

The foreign exchange market (also called forex or FX) refers to the over-the-counter (OTC) electronic
networks where currencies are traded.

Contrary to how it might sound, there is no single venue or (physical or digital) marketplace for trading
currencies. The “market” refers to the buying and selling that takes place through multiple payment or
trading networks.

How can retail investors access the foreign exchange market?

You access the currency market using a trading platform that’s usually provided by or associated with a
foreign exchange broker.

Here’s where investors often get confused. Banks are among the largest players in the forex world. So it
would stand to reason that, if you trade forex, you’re trading on the “interbank” network. But that’s far
from what’s actually happening.

Unless you’re trading upwards of a million currency units per trade (at least), your transactions are likely
too small to be included on an interbank feed. Instead, you’ll probably be working with a liquidity
platform (essentially a market maker) that’s providing the currency exchange quotes. The platform is
typically the seller to your buy orders and the buyer of your sell orders.

How is retail forex trading different from trading stocks?

If you’re coming from the stock trading world, there are a few more adjustments that might be difficult
at first. Here’s a short list:

Thinking in “pips.” Currency pairs move by “percentage in points,” more commonly known as pips. For
most currencies, pips are measured using four decimal points, so 1 pip = 0.0001 (ten thousandths of a
single currency unit).

Paying the spread. In forex, you often pay the difference between the bid and the ask, especially if you
buy or sell using a market order. So if the bid price for a given currency is 1.0050 and the ask is 1.0052,
the difference or “spread” is 0.0002, or 2 pips. In order to buy (or sell) into that market, you need to
cross the bid/ask spread, so your indirect cost is 2 pips.

Calculating the value of a pip. If you’re trading, say, the value of the euro versus the U.S. dollar
(EUR/USD), the monetary value of one pip will depend on at least two things: (1) Your domestic currency
(whether it’s part of the currency pair you’re trading or not) and (2) your position size. If your home
currency happens to be the base currency you’re trading, the conversion to pips is straightforward. But
if your home currency is the Canadian dollar or the British pound, you’ll need to convert to your home
currency in order to figure out your profit or loss from a EUR/USD trade. It’s a lot to unpack, so if you’re
new to forex, it might be best to stick to currency pairs with your home currency as the numerator or
denominator.

Position sizes come in different chunks. Some platforms allow lot sizes as small as 100 currency units,
while others deal in minimum sizes of 1,000 or 10,000. The standard lot size in retail forex is 100,000
currency units. This is a big deal, because the amount of money that moves each pip can vary
significantly depending on your lot size. Calculating the dollar-per-pip value of different lot sizes tends to
throw off many a “noob” trader in forex.

Money never sleeps (except on weekends and some holidays). Currencies can move significantly during
the European, American, and Pacific/Asian sessions within a 24-hour trading day, depending on the
currency pair. Unlike the stock market, which has a closing period, forex trades 24 hours a day, five days
a week (including some holidays). This means that if you hold a forex position past the current day, you
may be pleasantly or rudely awakened to discover how your currency pair moved while you were
asleep.
What happened to my balance? It’s a question that many new forex traders ask when encountering
overnight forex rollovers for the first time. The rollover rate is the net interest return on currency pairs
you hold after 5 p.m. ET. Remember that when you enter a forex trade, you’re borrowing one currency
to buy another. If the interest rate on your “long” currency is higher than that of your borrowed
currency, your account will be credited based on a positive net interest return. If the opposite is true
and your net interest return is negative, you’ll have to pay the difference, and your account will be
debited the amount you owe.

These examples just scratch the surface, but they’re among the primary differences that often catch
new forex traders by surprise.

How can I approach trading the forex market?

Here’s some advice: Know your fundamental analysis and technical analysis.

The fundamental analysis part can be tough. Analyzing the fundamentals of a currency pair often
involves studying the economic landscapes of two nations, not just one. That’s a lot of work, but if
you’re looking to become a sophisticated currency trader, there’s no way around it.

The technical analysis part may be a bit more approachable, as technical chart patterns and indicators
seem to be the same across all markets. In other words, classic chart patterns, candlestick patterns, and
technical indicators and oscillators can apply to currency markets without significant modifications or
adjustments.

What other ways can I trade currencies besides retail forex?

There are a handful of instruments you can trade to get exposure to foreign currencies. The most
common, and perhaps the simplest, ways to go about it are through currency exchange-traded funds
(ETFs) and currency futures contracts.

Currency ETFs. There are several ETFs that track single currencies, currency indexes, and baskets of
currencies. ETFs trade throughout the day—just like stocks—on stock exchanges, available through
virtually all broker platforms, and profits and losses are settled at the end of each trading day.
Currency futures. Futures contracts are highly leveraged instruments that represent a legal agreement
to buy or sell a particular commodity or asset at a predetermined price at a specified time in the future.
Mini and micro futures contracts are also available for most major currencies.

ETFs and futures also present their own unique risks, as every investment does. Get to know the
mechanism of the instrument and the risks involved before trading.

The bottom line

Trading forex can bring a bit of culture shock; you have to adapt to unfamiliar customs and learn
fragments of a new language. It can be exciting, but it’ll take time for you to get your bearings.

If you’re interested in trying your hand at forex, consider starting on a trading simulator (most of the top
brokers and forex platforms offer them). A simulator lets you buy and sell—and track profits and losses
—on prices as they exist in the real world, but with fake money. Learn the logistics, price dynamics,
chart patterns, and even your emotions, before you speculate with real dollars, pounds, euros, or yen.

Investing

Special purpose acquisition companies (SPACs)

A twist on IPO investing.

Written byAnn C. Logue

Fact-checked byThe Editors of Encyclopaedia Britannica

Photo of a blank check.

What's a blank check company?

© Douglas Sacha—Moment/Getty Images

Aspecial purpose acquisition company (SPAC) offers entrepreneurs a way to take their companies public
without an initial public offering (IPO). The SPAC itself goes public to raise money that will be used to
acquire a private company that’s ready for the public market. The acquisition turns a private company
into a public one. But because the money is raised without a target in mind, SPACs are often called
“blank check” companies.
Companies that successfully went public via SPACs include sports betting company DraftKings (DKNG),
electric vehicle maker Lucid (LCID), and financial company SoFi Technologies (SOFI).

A SPAC, or special purpose acquisition company, is a business that raises money in the public market to
acquire a private company.

Also known as blank-check companies, SPACs help investors access hot new public companies while
helping entrepreneurs take their companies public.

The risks of SPACs include a lack of transparency and bad acquisitions.

How SPACs work

The group of people who organize a SPAC are known as the sponsors. The sponsors may have expertise
and connections in a particular industry. They receive shares at a discount (often known as the
“promote” or “founders’ shares”) to compensate them for their efforts. The sponsors then work with an
investment bank to file a prospectus and, eventually, an IPO. In most cases, the IPO shares are priced at
$10 each. The sponsors agree to take the funds raised and use them to acquire a private, operating
business. In most cases, the funds must be spent within 24 months of the IPO. The money is held in a
trust account until the acquisition is complete or the deadline is hit.

If the deadline arrives without a business combination, the money is returned to investors.

The SPAC’s IPO prospectus often discusses the types of targets the sponsor is considering. However,
they have no obligation to find an acquisition that fits those parameters. The ability to find and close a
suitable acquisition is the key asset the sponsor brings to the table; some sponsors have better networks
and track records than others.

Because the founders’ shares cost less than those issued in the IPO, it’s possible for an acquisition to be
a good deal for the founders and a bad one for everyone else.

How a SPAC can benefit investors: Investors buy shares in a SPAC to eventually get shares in an up-and-
coming company at a good price. Buying into a SPAC is usually easier than buying shares in a hot IPO or
identifying a promising early-stage company for angel investing.
Because the terms of a SPAC combination are negotiated, the founders and investors in the target
company have more control over the terms of the deal. This can help them set up the company for
success after the transaction closes.

How a SPAC can benefit entrepreneurs: For the founders and private equity backers of a private
company that’s considering going public, merging with a SPAC offers more certainty over pricing and
deal terms compared to an IPO. And a SPAC transaction is faster than an IPO, giving target companies
rapid access to cash and the benefits of being publicly traded.

The drawbacks of SPACs

The financial markets are littered with companies that went public by SPAC and slipped straight to
penny stock territory—or bankruptcy court. Because SPAC sponsors do not identify the specific target
company at the time of the IPO, investors may have limited information about where their funds will be
invested. Some sponsors looking to get a deal done before the deadline may go after a less-than-ideal
investment.

Regulatory bodies have introduced guidelines to enhance transparency and protect investors. For
example, the U.S. Securities and Exchange Commission (SEC) requires SPACs to file the same quarterly
earnings reports and related filings as traditional public companies. When a transaction is announced,
SPAC investors receive a proxy statement that describes the target company’s business and the terms of
the deal.

SPAC sponsors are not allowed to trade on or tip material nonpublic information about the identity of
the target company. Nevertheless, the SEC has gone after a few SPAC executives for insider trading.

The bottom line

SPACs have emerged as an alternative avenue for private companies to access public markets, offering
speed and flexibility in the listing process. However, they also come with challenges related to
transparency, potential conflicts of interest, and regulatory oversight.

As the market continues to evolve, if you’re considering a SPAC investment, conduct your own due
diligence. Weigh the risks and rewards carefully before participating in this dynamic segment of the
financial markets.
Investing

Market capitalization: Its impact on stocks and your investing strategy

Size does matter.

Written byDan Rosenberg

Fact-checked byThe Editors of Encyclopaedia Britannica

Colorful Kettlebells On Tiled Floor In Gym

Stocks within many indexes are weighted by market cap.

© Kamonrat Meunklad—EyeEm/Getty Images

Acompany’s market capitalization—or total outstanding share value—might not seem important when
you buy the smartphone, cereal, or car the company manufactures. But when you buy shares, “market
cap” isn’t just a ranking system for stocks. It’s like having a playbook that tells you how a stock might
behave.

An ocean freighter loaded with heavy cargo doesn’t zip through the waves like a speedboat on your local
lake. Stocks also behave differently based on size. Traditionally, the biggest behemoths on Wall Street
often cruise along more slowly and steadily, while the smallest companies are primed for speed and
maneuverability. That’s why many analysts say you should consider a mix of different market caps in
your portfolio for proper diversification.

Key Points

Market capitalization is the number of outstanding shares of a company multiplied by its stock price.

Many major market indexes are organized by large-cap, mid-cap, and small-cap companies.

Market cap can influence how a stock behaves and influence your investment strategy.

You encounter market capitalization every time you check the major indexes. The Dow Jones Industrial
Average (DJIA) and S&P 500 (SPX), for example, are packed with some of the largest companies. The
Russell 2000 (RUT) tracks 2,000 “small-cap” companies.
Some monster names on Wall Street, such as Apple (AAPL) and Microsoft (MSFT), have sometimes
boasted market capitalizations of $2 trillion or more. But many stocks don’t even reach $1 billion on the
market cap scale. That means the biggest stocks are worth more than 2,000 times the smallest, kind of
like comparing the Queen Elizabeth luxury liner to a kayak.

How market cap is determined

What is market capitalization, exactly? It’s calculated with simple multiplication:

Stock price (X) multiplied by the number of shares outstanding (Y) = market capitalization (XY).

Companies issue shares, and the market decides every day at what price those shares should trade. The
outcome is the total share value, or market cap, of the company.

Bitcoin and other cryptocurrencies also can be valued by market cap. Here’s how crypto market cap is
calculated:

Current price (X) multiplied by the number of coins in circulation (Y) = market capitalization (XY)

Market capitalization and stock indexes

Stock indexes tend to focus on specific stock sizes, and the value of an index is often calculated based on
company market caps. For instance, to be added to the S&P 500, which covers approximately 80% of
U.S. market capitalization, a stock must have a market cap of $14.6 billion or greater. That figure is
reviewed quarterly and may be adjusted. It also doesn’t apply to companies already in the index, so a
company could potentially remain in the S&P 500 if its cap falls below $14.6 billion.

The SPX is a “market-cap-weighted” index, meaning stocks with larger market caps have a bigger impact
on the index’s performance. The idea behind cap-weighted index calculation is that the highest-valued
stocks should have a bigger impact on index performance. So, a $2 trillion company has far more impact
on S&P 500 performance than, say, a $15 billion company.

Good to Know

At one point in 2021, five major technology companies (Apple, Amazon, Facebook parent Meta,
Microsoft, and Google parent Alphabet) made up nearly 23% of the S&P 500’s value. The other 495
stocks, combined, accounted for the remaining 77%. So when the SPX makes, say, a 2% move, it’s
important to check the top few stocks and see how they performed. That often tells most of the story. It
also means there are days when hundreds of S&P 500 stocks fall, but the index rises anyway (and vice
versa).

The DJIA, on the other hand, is a “price-weighted” index of 30 large-cap U.S. stocks. The price-weighted
nature of the index means price changes in its highest-priced stocks have a greater impact on the index
level than price changes in the lower-priced stocks, regardless of company size. That makes it a bit of a
relic and perhaps a less reliable indicator of overall market performance. Many market experts
recommend following the SPX more closely for a quick snapshot of overall stock performance.

FTSE Russell Indexes—a subsidiary of London Stock Exchange Group, which manages the RUT and
several other indexes—performs an annual “reconstitution,” in part to determine where companies fit
along the capitalization spectrum. This way, when investors buy an index fund based on the Russell
2000, they can be sure no stocks in the fund have outgrown their small-cap status.

Notes on market cap behavior

Although there are no firm and fast rules for how a stock behaves based on market cap, there is some
common wisdom in the markets about how large-caps tend to move relative to small-caps, based on
outside factors such as recessions and the strength of the dollar. Here are a few to keep in mind:

Dividends and growth stocks. Until recently, many investors saw large-cap stocks as steady performers
that typically paid dividends, delivered predictable earnings, and were viewed as “cash cows” rather
than high-growth flyers. That changed with companies like Apple and Microsoft, which continue to post
huge growth numbers many decades after becoming publicly held companies. Plus, they pay dividends.

Old-line large-caps. Investors seeking dividend income and slow but steady earnings still often choose
large-cap stocks that have been around for decades. Many of the big industrial, materials, and consumer
staples companies fit into this category. Think Caterpillar (CAT), Dow (DOW), and Coca-Cola (KO), for
example.

Small-caps and the domestic economy. Small-caps, and to some extent mid-caps, tend to do more of
their business domestically, meaning they often perform best when the U.S. economy accelerates.
When the U.S. economy flags, small-cap companies, with their heavier domestic exposure, can
sometimes be the first stocks to lose ground. Sometimes their revival can signal the final stage of a
recession.
The U.S. dollar. Large-cap companies often do a heavier percentage of their business overseas. They may
benefit when the dollar is weak, because a weak dollar tends to give overseas economies a boost. A
strong dollar, on the other hand, makes products of large, multinational companies more expensive to
overseas customers and can weigh on large-cap earnings.

When the dollar is strong, small-cap companies sometimes benefit from their domestic exposure. A
strong dollar can make it less expensive for U.S. companies to buy products from overseas, helping their
margins.

The bottom line

Knowing a stock’s market capitalization can provide a sense of how it might behave under different
economic circumstances, and also helps you understand the composition and performance of major
market indexes.

Investors might want to divide their portfolio among stocks of different market capitalizations, or they
could risk losing too much ground when large-caps or small-caps sag.

Investing

Get your portfolio’s passport stamped: Reasons to consider international investing

Own a little bit of the great big world out there.

Written byDebbie Carlson

Fact-checked byThe Editors of Encyclopaedia Britannica

Global stock market chart on trading board.

Take your portfolio international.

© Yuichiro Chino—Moment/Getty Images

Investing in foreign companies and markets is a common way to build some diversification into your
portfolio. It spreads investment risk, allows you to participate in growth opportunities outside of the
U.S., and provides exposure to emerging markets that can sometimes grow faster than developed
markets.

Key Points
Investing overseas helps diversify your portfolio, because international markets don’t always go the
same direction as the domestic one.

Overseas investing can open up growth opportunities in emerging markets.

Drawbacks to international investing include higher costs and geopolitical risk.

If you love traveling overseas, have you ever considered letting some of your portfolio also take a trip
abroad? Maybe you’ve thought about it and decided it’s too complicated, but that’s really not the case.

If you can plan a detailed European vacation itinerary, you’re well equipped to research and purchase
stocks or funds from Europe or elsewhere. International exchange-traded funds (ETFs) make it easier
than ever to own foreign stocks.

Why it’s important to invest internationally

It’s a big world out there. Diversifying your portfolio by investing overseas can help smooth out volatility,
or market swings. Foreign markets usually won’t rise and fall at the same time as U.S. markets because
they’re often influenced by different factors.

Over the last 10 years, U.S. equity markets represented on average 37.4% of global equity market
capitalization, according to SIFMA, a U.S. trade association for the nation’s securities industry. That
means the rest of the world comprises nearly 63% of what’s available to investors. You wouldn’t invest
your money in just 37.4% of U.S. stock sectors (unless you had an extremely narrow investing approach).
So why tie up all your funds in a country that represents less than 40% of global market capitalization?

This doesn’t mean you need to put more than 60% of your money into overseas stocks. Instead,
consider having at least a little exposure. How much depends on your overall investment goals.

Where to invest internationally

When looking outside of the U.S. to invest, start with regions. Most international investment regions are
broken down geographically:

Asia-Pacific. This region includes countries such as Australia, Japan, and South Korea.
Europe. Think Germany, France, and the Netherlands.

Latin America. This region spans from Mexico to Brazil and Argentina.

Middle East and Africa. This broad category features countries such as Saudi Arabia, Egypt, and South
Africa.

How to invest internationally

International investing can be done in a variety of ways and styles. Many investors stick to large-cap
international companies, but there are also mid-cap and small-cap stocks in different regions and
countries. There are a few ways to access foreign investments.

American Depositary Receipts (ADRs). These are non-U.S. company stocks trading in U.S. markets. Each
ADR usually represents one share of foreign stock (although multiple shares or fractions of shares are
possible). This is a streamlined and efficient instrument for U.S. investors to own foreign companies.

U.S.-listed international exchange-traded funds (ETFs) and mutual funds. Funds can provide investors
with much more diversification and easy access to non-U.S. companies than individuals can likely put
together on their own. Because these funds are subject to U.S. regulations, they also offer protections.
These funds can be actively managed, like many mutual funds, or based on a passive index, like most
international ETFs. These funds offer investors different types of exposure, such as:

Global funds, which invest internationally but may have some U.S. company exposure.

International funds, which exclude all U.S. companies.

Regional or country-specific funds, which focus on an area, such as Asia-Pacific, or a certain country,
such as China.

International investing points to ponder

When investing internationally, keep in mind a few factors that may affect how well your investment
performs.

Currency. The strength or weakness of the U.S. dollar affects international investments. A strong U.S.
dollar works to U.S. investors’ advantage because they can buy more foreign shares, says Pat O’Hare,
chief market analyst at research firm Briefing.com. The trade-off occurs when investors sell those assets
and it’s more expensive to convert foreign-currency-denominated shares back into U.S. dollars. One way
to eliminate currency risk is to use currency-hedged ETFs, O’Hare points out.

Costs. International equity funds are more expensive than domestic funds. According to data from the
Investment Company Institute in 2021, the asset-weighted average annual equity ETF expense ratio was
0.16%, a figure that includes all types of ETFs, whereas the asset-weighted average annual equity ETF
expense ratio for international ETFs was 0.24%. For mutual funds, the average expense ratio for equity
mutual funds was 0.47% versus 0.60% for world funds.

Political events. Changes in political parties, government policies, and other events can affect
international holdings. For example, when the U.K. voted to leave the European Union—an event known
as Brexit—it pressured U.K. stock markets. Emerging markets can also offer robust growth
opportunities, but tend to be subject to more geopolitical risk.

Liquidity. Some international markets, particularly in small countries, can be less liquid. There aren’t as
many active trading participants, so when something happens—a market-moving news event or a large
trade entering or exiting the market—prices can swing around a lot.

Invest abroad, at home

Another way to invest internationally is to consider shares of “hometown” companies that might already
make some of your favorite products. We’re talking Big Macs and iPhones.

Many large-cap U.S. companies derive much of their revenue outside of the U.S. That means you can
think of these shares as another way to get international exposure without dealing with some of the
unique circumstances of holding non-U.S. investments, O’Hare says.

For example, semiconductor chip maker Nvidia (NVDA) derives more than 80% of its revenue outside
the U.S. More than three-quarters of vaccine manufacturer Moderna’s (MRNA) revenue is non-U.S.;
Apple’s (AAPL) foreign revenue is about 67%; and McDonald’s (MCD) international operations bring in
50% of its revenue.

The bottom line

International investing is a good way to diversify a portfolio to take advantage of economic growth
outside the U.S. Because markets don’t often move in lockstep, it’s also a way to smooth out total
returns. But owning international stocks has its own risks and costs, so you should review potential
holdings to see how they match up with your goals and risk tolerance.

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