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Sometimes known simply as a portfolio investment, a foreign portfolio investment is an investment activity that involves the purchase of stocks, bonds, commodities, or money market instruments that are based in a different country. In some cases, these types of investments are short-term in nature, allowing the investor to quickly take advantage of favorable exchange rates to buy and sell the assets. At other times, the foreign portfolio investment is acquired with plans of holding onto the asset for an extended period of time.
In many ways, a foreign portfolio investment is no different from purchasing investments that are domestic in nature. Investors will consider the financial condition of the entity that is issuing the investment, gauge the potential for that investment to generate returns over a specific period of time, and consider what type of events could occur that would have a negative impact on the growth potential of that holding. Consideration of the ease of trading the asset when and as desired will also be a factor that investors will assess before choosing to make the purchase.
There are several characteristics that tend to define the nature of a foreign portfolio investment. Typically, the investor has no desire to be actively involved within the management of the asset. In addition, the investment will not provide the investor with a controlling interest in the issuing company. While the number of shares acquired may be significant, the shares will not position the investor so that he or she has a great deal of control over how the issuer conducts business. Along with the somewhat hands-off nature of a foreign portfolio investment, there may also be certain tax requirements that the investor has to both the nation in which the assets are based and his or her own home country.
Under the right circumstances, a foreign portfolio investment can be an excellent way to generate a decent amount of return in relatively little time. This is sometimes managed by paying close attention to current conditions in the foreign exchange market. If the investor can use the right currency to make the purchase, then sell that same investment when exchange rates are in his or her favor, there is the chance to not only earn returns from the upward movement of the investment itself, but also from the current rate of exchange between the two currencies involved. While this type of strategy does require careful timing of both the purchase and the sale, the end result can be well worth the time and effort.
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