The main reason for portfolio investment is the desire to place capital in the country and in securities that will bring maximum profit with an acceptable level of risk.
Read more The main advantage of such investment is the ability of the investor to choose the country for investment, where the optimal income will be provided with minimal risks. This investment can also be used as a means of protection against inflation. At present, several obstacles must be overcome to implement international ones:
- psychological, such as ignorance of politics, economics, culture, language, trading methods, etc.;
- informational, it is quite difficult for an investor to obtain reliable information about foreign markets, unlike national ones;
- legal, related to the complexity of placing capital in another country and returning it, along with your own income. After all, the income will be taxed first in the country of investment, and then also in your home country;
- increased service costs, which include fees to intermediaries, higher fees for drawing up agreements (due to multi-currency), communication costs.
When buying securities, an investor, of course, strives to get the greatest benefit, with an acceptable risk. But these goals cannot be achieved by simply selecting the most profitable securities. Therefore, it is necessary to create a portfolio of securities. Depending on the tasks and goals when forming a portfolio, you need to choose the ratio of interest between different types of assets.
Risk diversification: One of the main reasons for portfolio investing is the ability to reduce risks. By investing in different asset classes (stocks, bonds, real estate, etc.), investors can protect themselves from losses associated with a drop in the value of one of the assets. Diversification helps smooth out fluctuations in returns and reduce the impact of negative events on the overall portfolio.
Return optimization: Portfolio investing allows investors to find the optimal balance between risk and return. Different assets have different levels of return and volatility, and the right allocation of funds can lead to higher overall returns.
Long-term goals: Many investors strive to achieve long-term financial goals, such as saving for retirement or children's education. Portfolio investing helps build a stable financial foundation that can grow over time through compound interest and reinvestment of earnings.
Flexibility and Adaptability: Portfolio investing provides the ability to adapt a strategy based on changing market conditions and personal financial goals. Investors can regularly review and adjust their portfolios to suit current economic realities and personal preferences.
Depending on profitability and risk, investment portfolios are divided into:
- high-yield portfolios, aimed at obtaining high profits, usually with high risks;
- constantly profitable portfolios, aimed at obtaining average profits, usually consist of a set of reliable securities, the risks, with this type of investment, are significantly lower;
- combined portfolios, investments of this type occur in companies with different levels of profitability and risk, to minimize risks.
According to the degree of risk, portfolios are also called aggressive (high-risk), balanced or moderate (medium-risk) and conservative (low-risk).
Based on the types of securities that are included in the portfolio, we can distinguish:
- a portfolio of debt securities;
This is a portfolio formed from various bonds.
- a portfolio of equity securities;
This is a portfolio formed from shares of various companies.
- mixed portfolio;
This is a portfolio that includes both debt and equity securities.
- portfolio of derivative financial instruments.
This is a portfolio consisting of futures, forward contracts or various types of options.
By the term for which the portfolio is formed, it can be classified as:
- short-term (up to 1 year);
- medium-term (1-3 years);
- long-term (more than 3 years).
By the type of management applied to the portfolio, there are 2 types:
- active management portfolio;
This portfolio is typical for aggressive investors who are constantly monitoring the stock market, due to which they have the opportunity to receive income from short-term fluctuations in rates. Active management involves the inclusion of high-risk financial instruments in the portfolio, timely rebalancing of the portfolio, changing its structure and composition taking into account all factors of the stock market and its individual participants.
- passive management portfolio.
This is a more stable long-term portfolio. It is formed by conservative investors. Such a portfolio involves the inclusion of low- and medium-risk securities for the long- and medium-term perspective. Such a portfolio is rebalanced much less often due to the fact that it is formed by more stable financial instruments.
Thus, the classification of portfolio investments is quite multifaceted. The choice of a specific type of portfolio depends on the individual preferences of the investor, his risk appetite, investment terms, volumes of invested funds, goals of the investment strategy and other factors.
When carrying out international portfolio investment, a number of objective obstacles and difficulties may arise.
Firstly, these are psychological obstacles that are associated with international investment. They are mostly due to ignorance of the economy, politics and culture of other countries, foreign languages, methods of trading in financial markets, principles of reporting, etc.
Secondly, obstacles to international investment include information difficulties. It is difficult for an investor to quickly obtain reliable, objective and comprehensive information about foreign markets and foreign issuers. It is much easier to obtain the same information about participants in the national market.
However, a significant part of the information about foreign securities traded on international markets, about financial analysis and expected income of companies is published both in the national and English languages.
The third group of obstacles to international investment includes legal difficulties. They are associated with the placement of capital in the country of investment and its return along with the income received to one's own country. Legal difficulties also include the specifics of taxation in the recipient country of investments.
As a rule, the following taxes are levied on foreign investment transactions: transaction tax; capital gains tax; tax on income from foreign investments.
Transaction tax, compared to other taxes, is mostly small and can be:
- proportional to the volume of the agreement;
- proportional to the size of the commission (in countries where brokers charge commissions);
- fixed.
Capital gains tax is levied in the investor's country. Capital gains are calculated as the difference between the sale and purchase prices of securities.
Foreign investment income tax is paid by a legal entity in one country to a resident of another country. The desire of both countries to levy this tax leads to the problem of double taxation. In order to resolve this situation, international agreements are concluded, according to which the investor receives income in the country of investment minus tax, as well as a tax credit. In the home country, the total amount of foreign income minus taxes collected in the country of investment is taxed.
The expansion of investment activities to the international level has raised the issue of the need to manage a number of new risks for investors. The risks associated with international investments include:
- risks of national markets (specifics of the investment climate in the country of investment);
- political risk - the possibility of expropriation of assets, changes in tax policy, restrictions on foreign exchange transactions or other changes that affect the business climate of the country of investment;
- currency risk (risk of changes in the exchange rate) - uncertainty in the return of assets, which is caused by changes in the exchange rates of foreign currencies (in particular, the currency of the recipient country of the investment and the currency of the investor).
The fourth group of obstacles to entering the foreign portfolio investment market is increased operating costs. International investments are usually associated with additional transaction costs, which include:
- increased commission fees to intermediaries in foreign markets;
- increased fees for the execution of agreements (this is related, in particular, to the multi-currency accounting and reporting system);
- increased fees for the management of international investment portfolios (this is related to international market research, subscription to international databases, cost of communications, etc.). Despite the existence of a fairly wide range of obstacles to the entry of portfolio investments to the international level, they are currently being actively overcome within the framework of international integration and cooperation processes.
