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Investing in Foreign Markets and Exchange Traded Funds

While stocks, bonds and mutual funds are the most commonly know investment vehicles, there are other options available, including foreign market investments and exchange traded funds (ETFs).

Foreign Markets

Although the US stock market is still the best market to invest in, you may want to consider investing in foreign markets. One of the big draws of investing in foreign markets is the fast growth rates. Since foreign markets are not as mature as US markets, it only makes sense that they would grow at faster rates and have higher returns.

So how, exactly, do you go about investing in a foreign market? Luckily, there are numerous foreign stocks that trade on US stock exchanges, just like American stocks. A foreign stock will always have 'ADR' listed after its name. An ADR is a stock that trades in the United States but actually represents a specified number of shares in a foreign company. ADRs are bought and sold on American markets just like American stocks, and are issued in the U.S. by a bank or brokerage. This enable US investors to buy shares in foreign companies without undertaking cross-border transactions.

Foreign stock is traded in US dollars, so currency conversions are not necessary to buy or sell. However, there is some currency calculation involved in pricing the stock, and again when it's sold. Like U.S. Stock, the price of this stock rises and falls on supply and demand, but usually follows the price of shares on its native exchange. However, there are times the U.S. price and the price on the native exchange don't come even close to matching.

With the potential for high returns in foreign markets also comes some risk. Political unrest can negatively affect your investment as well as rising inflation rates in emerging markets. In fact, raging inflation can be quite devastating to your investment.

Exchange Traded Funds (ETFs)

An Exchange Traded Fund (or ETF) is similar to a mutual fund in that it's comprised of a basket of securities (usually stocks and bonds), but the important difference is that shares can be traded on stock exchanges throughout the day. ETFs use computers to track an index, such as the Dow Jones Industrial Average or the S&P 500. One of the most widely known ETFs is called the Spider (SPDR), which tracks the S&P 500 index and trades under the symbol SPY.

ETFs generally mirror what's going on in the market and are good for long-term investing. They also provide easy diversification (there are even ETFs that represent foreign investments) and the lowest cost way to own a basket of stocks.

Foreign markets and ETFs provide investment options outside of the standard stocks and bonds. Just be sure to weigh the pros and cons before making an investment decision.