EVALUATE THE RISKS AND REWARDS

Evaluate the risks and rewards of investing in overseas and/or emerging stock markets

Evaluate the risks and rewards of investing in overseas and/or emerging stock markets

Introduction

Stock market indexes reflect value changes in stocks they represent and play the role of a benchmark in evaluating the performance of investment managers. They are also used as the underlying value of stock index futures and stock options. The relationship between a stock market index and its volatility has been studied extensively in advanced market economies.

Considering the contributions of the developed stock markets to their economies has led researchers to focus on how the stock markets can be developed in the developing economies so that these economies also enjoy the benefits of the stock markets. Emerging stock market Investors are fully aware that in today's scenario of the financial market, India and China are the preferred destinations for most of the financial institutions.

Background

The main reason is the strong economic growth the countries are passing through. Emerging market economies are out performing developed countries in the global economic recovery and may continue for atleast few more years. Investors are required to search with the help of internet for global opportunities that may offer better appreciation on their investments. Investors can select American depository receipts which are listed on reputed foreign exchanges and earn a lot of money.

Investors have many parameters to select stock from in emerging markets. One of the experts recommends banking on price to sales ratio strategy. Investors are required to compare a companys market value with its revenue generated per year. By implementing this particular method it is revealed that investors have achieved appreciation on their investment to the tune of 13 to 14 percent annualized returns excluding the brokerage fees and other expenses. The type of stock chosen was from the small cap category and it was working successfully for nearly 8 to 10 years. In this process, investors need to apply simple mathematical formulas. Investors have to make a list of 40 to 60 companies which are the cheapest with respect to share price to sales ratio. This exercise can be done with the help of computers. Next step is to purchase all the stocks. Later on the stock list is to be further refined by eliminating the stock which is below the inflation adjusted value. China and India are two of the fastest-growing investable economies on the planet, and have been transformed into global leaders in both the manufacturing and service sectors. At the same time, Brazil and Russia each has become a cornucopia of commodities, and are emerging as global leaders in the white-hot global energy sector. The experts quote the example of other methods such as price to earning ratio or price to book value ratio. Investors who bought the shares on the basis of low price to earning ratio landed up holding of shares of utility or steel companies. Subsequently it was found that, investors earned more in price to ...