There will always be a certain amount of risk when investing in the stock market. It’s impossible to accurately predict when the market will rise and fall, but taking into account long-term trends is a way to find safer investments that have proven profitable over long stretches of time. Cautious investment in established economies is generally viewed as the best method to grow long-term wealth. However, this approach requires an investment of time as well as money.
More challenging and potentially more lucrative are the emerging markets that now account for over half of the gross domestic product across the globe. If investing in emerging markets is something you are interested in, first, you need to understand how it works so you can manage your expectations and avoid a costly financial misstep.
What Are Emerging Markets?
Global finance opportunities are always changing, expanding, and merging with the developed global economy. The new emerging economies entice investors with the chance to gain huge returns. As populations expand, developing economies experience rapid growth and innovation, resulting in emerging markets prime for investment.
These markets, like those discussed by Nasdaq, include Brazil, China, India, Mexico and Turkey. These countries provide an excellent way to diversify your portfolio if your finances are strong enough to survive the potential lows of a volatile market economy. Investing internationally is an appealing prospect for many, but the risk you undertake when investing in these less developed economies is much higher than in established markets. The appeal lies in the potential for high gains, diversification, and the opportunity to have an impact on a global scale.
Investing in an emerging market economy requires not only significant initial research but also ongoing and active management. These markets can change rapidly due to a variety of factors, making this type of investment opportunity a unique challenge and one you must be prepared to watch closely.
Determining the Risk Level of Emerging Markets
Investing your money smartly requires that you do your research to thoroughly explore an opportunity and conduct a risk assessment before you proceed. Emerging markets naturally have higher risks than developed markets. Factors that can impact your investment include:
- Political instability.
- Volatile currency value.
- Problems with infrastructure.
- The inability for outside investors to access liquid markets on the stock exchanges.
- Lack of liquidity.
- Increased risk of insider trading.
- No regulatory body to monitor the market.
It’s also worth noting that you will need to convert your currency to the local currency to invest, and back to cash out any gains. This means that fluctuations in the exchange rate can impact your net loss or net gain. When dealing with money exchanges, you not only assume the risk of the investment itself, but the less developed market economy may also pose a threat to the security of your financial details.
How to Find Investment Opportunities
Since emerging markets don’t have the same historical record of information to inform your choice that developed markets provide, you need to know what information is relevant to your research. As you learn more about the various opportunities, you can start to recognize the signs of a solid investment with fewer risks. This could include factors like an established regulatory institution, banks, and other physical examples of financial infrastructure, as well as a stable currency. You should also research trends in education and the main industries of the economy. A key indicator is If the government shows evidence of moving away from agricultural pursuits and into industrialization, exports, and trade. These are all signs that the market is stable enough to experience economic growth, which is when the potential for a big return is high.
Classification of Emerging Market Economies
An emerging market can refer to any country experiencing fast economic growth, but entities like Dow Jones, Morgan Stanley Capital International (MSCI), and The International Monetary Fund (IMF) have ever-changing lists of current emerging market economies. Countries get added and removed as their financial systems develop and change.
Each entity has its own criteria for what makes an emerging market, so the lists may not have the same countries. The most common criteria are economic growth toward middle-income levels, market access, and an increasing economic presence, which makes the country more relevant to the global market. You may want to read and compare lists to gain as much insight as possible.
The Bottom Line: Balancing Opportunity with Risk
Before you begin investing in emerging markets, get clear on your financial goals. Are you looking to build reliable long-term wealth, or do you want to expand your investment portfolio and get involved in something new and exciting? You must understand the risks you undertake, like the possibility you may lose your money.
Emerging markets come with the added risk of an untried and unstable market economy that may fail, along with volatile currencies and potentially unstable governments. However, they also offer a unique opportunity to score a major win by diversifying into international investments and getting involved in investments with huge growth potential before they become more mainstream. The excitement and potential payoff are invigorating if you have an adventurous spirit.
You might also be interested in: 9 Ways to Prepare for a Recession
