When you hear someone talk about the stock market, do you understand the terms they use – domestic markets, international markets, emerging markets, developed markets; small- mid- or large-cap stock; growth or value stock?
Is the jargon confusing? Understanding these terms will help you navigate the world of stocks. This blog will cover broad market definitions. Market capitalization definitions are defined in my next blog, and growth and value were covered in my blog, A Lesson from Eigengrau.
The World Markets
As of 2023, there are approximately 80 stock exchanges throughout the world. However, only about 20 have market capitalizations (the total dollar market value of the outstanding shares of stock traded on that exchange) over $1 trillion each and they account for roughly 87% of global market capitalization. The largest stock exchange with $25.5 trillion market capitalization as of December 2023 is the New York Stock Exchange (NYSE). Many of the largest exchanges now reside in Asia.
As of December 2023, over 55,000 companies are publicly traded throughout the world. With international stock markets comprising about 41.6 percent of the world’s capitalization as of 2022, a broad range of investment opportunities exist outside the borders of the U.S. How can a person decide which of those companies make a good investment?
Domestic vs. International Stocks
Domestic and international stocks differ primarily in their geographic focus and the associated risks and opportunities. Here are some key differences:
Geographic Focus
- Domestic stocks are issued by companies based and operating within the investor’s home country.
- International stocks, also known as foreign stocks, are issued by companies based outside the investor’s home country.
Market Dynamics
- Domestic stocks are influenced by the economic, political, and social factors of the investor’s home country.
- International stocks are affected by a broader range of global factors, including geopolitical events, currency fluctuations, and regulatory changes in multiple countries.
Diversification
- Investing in international stocks can provide diversification benefits by reducing exposure to risks specific to one country or region.
- However, international investment may also introduce currency risk and additional geopolitical risks.
Market Liquidity
- Domestic stock markets may offer higher liquidity due to greater familiarity and participation from local investors.
- Liquidity in international markets can vary widely depending on the country and region, potentially impacting trading costs and execution.
Volatility and Returns
- International stocks may exhibit higher volatility compared to domestic stocks due to factors such as currency fluctuations, geopolitical tensions, and varying economic conditions across countries.
- Historically, international stocks have shown periods of both outperformance and underperformance relative to domestic stocks, providing opportunities for diversification and potential returns.
Access and Investment Options
- Investing in domestic stocks is often easier and more straightforward for investors, with access to a wide range of brokerage platforms and investment vehicles.
- Accessing international stocks may require specialized brokerage accounts, investment products such as global mutual funds or exchange-traded funds (ETFs), or direct investment in foreign markets, which may involve additional complexities and costs.
Developed and Emerging International Markets
Developed and emerging international markets represent different stages of economic development and maturity, each with its own characteristics, risks, and opportunities.
Basic Characteristics
Developed markets are characterized by mature economies with advanced infrastructure, well-established financial systems, and stable political environments. Examples include the United States, Canada, Japan, and Western European countries.
Emerging markets, on the other hand, are countries with rapidly growing economies, transitioning from low-income to middle-income status. These markets often have developing infrastructure, evolving financial systems, and may experience higher volatility in economic and political conditions. Examples include China, India, Brazil, and South Africa.
Regulations
Developed markets typically have larger and more liquid stock exchanges, with established companies and extensive investor participation along with well-defined regulatory frameworks, strong investor protections, and transparent reporting standards. Emerging markets may have less developed regulatory environments, with varying levels of transparency, corporate governance standards, and investor protections. Regulatory stability and enforcement can also differ significantly across emerging markets.
Currencies
Currencies in developed markets are often more stable and less susceptible to volatility compared to those in emerging markets. Emerging market currencies may be more volatile due to factors such as fluctuating inflation rates, political instability, and changes in global investor sentiment. Currency risk is an important consideration for investors in emerging markets.
Risk and Growth
Developed markets generally offer lower levels of risk but may also have lower potential returns compared to emerging markets. Emerging markets typically carry higher levels of risk. However, they may also offer higher growth potential and higher returns over the long term.
Diversification
Diversification is an important consideration when investing, and developed markets tend to have stronger correlations with each other, as they are often influenced by similar global economic trends and factors. Emerging markets may have lower correlations with developed markets and with each other, providing potential diversification benefits.
The differences in domestic and international investing as well as international developed and emerging markets offer a wealth of investment choices, and you will find that the same broad descriptions also apply to bonds.
Please don’t let all the choices overwhelm you. A good place to start for step-by-step assistance is my book, How to Dress a Naked Portfolio: A Tailored Introduction to Investing for Women.
Other Classifications
Is your head swimming? Enough for today! To give them justice, the characteristics of small-, mid-, and large-cap stocks will be covered in my next blog – Why is Market Capitalization Important to an Investor? Watch for it!
Let’s Have a Conversation:
Do you invest in both domestic and international stocks? How about bonds? What helped you make your choices?
