Foreign Capital Market and Instruments Explained

Foreign Capital Market and Instruments Explained

1. Foreign Capital Markets and Instruments

2. Introduction Capital markets carry out the desirable economic function of directing capital to productive uses. Foreign Capital Markets  are the same mechanism but in the global sphere, in which governments, companies, and people borrow and invest across national boundaries.  Certain features of this market include Global Accessibility, Currency Diversity, Risk Diversification and Market Liquidity and Efficiency. As per SIFMA, the U.S. economy witnessed gross activity (purchases and sales) in foreign securities increased to $53.3 trillion in 2022, an increase of 1.0% Y/Y and is expected to rise despite the ongoing political and economic strains.

3. Types of Foreign Capital Market Instruments

4. 01 Debt securities issued by national governments to finance spending or manage debt. Considered low-risk investments, especially if issued by stable governments. Government Bonds Financial securities collateralized by assets like mortgages or auto loans, offering cash flows from the underlying assets. Asset-Backed Securities (ABS) 03 Debt securities issued by corporations for various purposes such as expansion or operations. Offer higher yields than government bonds but carry higher risk based on the corporation's creditworthiness. Corporate Bonds 02 Bonds issued in a currency different from the issuing country's currency, typically traded outside the country's regulatory jurisdiction and denominated in any currency. Eurobonds 04 Debt In a foreign capital market, debt instruments refer to financial securities that represent a loan made by an investor to a borrower. These instruments typically have fixed terms outlining the repayment schedule, interest rate, and other conditions.

5. 01 Ownership shares in a corporation with voting rights and potential dividends, traded on stock exchanges for capital appreciation. Common Stocks U.S. bank-issued receipts for foreign company shares, allowing American investors access without direct foreign exchange dealings. American Depository Receipts (ADRs) 03 Hybrid securities with fixed dividends, priority in dividend payments and asset distribution, but no voting rights, combining features of equity and debt instruments. Preferred Stocks 02 These are issued by banks outside the U.S., facilitating international trading of foreign company shares. Global Depository Receipts (GDRs) 04 Equity Equity instruments represent ownership in a company and provide investors with a claim on the company's assets and earnings. In foreign capital markets, equity instruments are essential for investors seeking to participate in the growth and profitability of companies outside their home country.

6. Bonds Bonds are fixed-income securities representing debt obligations issued by governments, municipalities, or corporations to raise capital. Bondholders receive periodic interest payments, providing a predictable income stream. Bonds have a maturity date when the principal amount is repaid, indicating the duration of the bond. Bonds offer a lower risk compared to stocks, but the return is generally lower. Understanding the risk-return tradeoff is crucial. Bond prices are inversely related to interest rates – when rates rise, bond prices fall, and vice versa Key Features: Maturity Date Face Value Coupon Rate Yield

7. ETFS An exchange-traded fund (ETF) is a type of pooled investment security that can be bought and sold much like an individual stock. ETF share prices fluctuate all day as the ETF is bought and sold; this is different from mutual funds, which only trade once a day after the market closes. ETFs provide a way to invest in a wide array of securities, offering diversification within a single investment. This can help reduce risk compared to investing in individual stocks or bonds. Most ETFs regularly disclose their holdings, allowing investors to see the assets they own. ETFs offer low expense ratios and fewer broker commissions than buying the stocks individually. To invest in an ETF, you'll need a brokerage account. Some brokerages offer commission-free ETF trading, while others may charge a fee for buying and selling.