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Should You Invest in Emerging Markets?

Aug 20, 2008
Emerging markets is a lucrative field of trading. An emerging market occurs in third world countries whose economies and developments are on the rise. Developing countries can experience intensely quick economic growth, which makes them quite attractive to investors. Economic development comes in the form of putting infrastructure such as roads and telecommunications into place and building factories, so there is a huge demand for concrete, steel and other building materials.

Examples of emerging markets are China, India, Mexico, Russia and Brazil, but there are over one hundred countries that are considered to be emerging markets. Is investing in an emerging market a viable trading strategy for you?

If the bulk of your stocks and trades are with U.S. companies, then it makes sense to diversify by adding in some foreign investments. Investing in emerging markets means that you are in it for the long haul. It is not a place to get a quick return on your investments. In fact, it can take years to turn a profit. Is that a return that you can wait for?

What is your tolerance for risk? Investing in an emerging market can be very risky. Often in an emerging mark country there are volatile conditions with which you must contend and you have no control over. Political coups, economic fluctuations, and changes in national policies are all factors in the market. Emerging markets are very vulnerable to fluctuations in the currency exchange rates.

As with any investments that you are contemplating, you should only invest what you are prepared to lose. Remember, with great risk factors comes the potential for great gains, but you need to come to terms with your risk tolerance, and every investor will have to assess that for himself.

In addition, some emerging markets are considered closed societies. Countries such as China do not release information easily, so this is a concern. These markets are not liquid, so if a bunch of investors rush to sell their stocks all at once, it can literally cripple the emerging mare's economy. If this is a huge concern for you, maybe emerging markets is not for you. You might want to consider investing in an emerging market mutual fund instead. If you want to invest on your own, you will need to do the research to find the right countries and companies to target as potential investments. You would be wise to invest in a service that assesses the foreign markets for you.

A word of advice: If you choose to invest in emerging markets, don't put all of your eggs in one basket. Everyone talks about having a diversified portfolio, and this absolutely critical. The more industries you invest in, the more spread out over stocks, bonds, futures etc., that you can be involved in, the better off you will be financially. If something goes bust in one area, you'll be pretty safe because your investments are spread out so this helps to minimize your risk. No more than five percent of your entire investment portfolio should be sunk into emerging markets.
About the Author
Mark Crisp is the momentum stock trader. Finding the hot stocks that are going up right now and will continue to go up in the future. Sign up for my free e-course at: http://www.stressfreetrading.com
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