Foreign portfolio investments

Portfolio investments are often considered financial or speculative. Foreign portfolio investments, as opposed to strategic ones, are designed to have a higher financial return than in the home country. Portfolio investments are purely financial assets, such as stocks or bonds, that do not provide control over a company. Although foreign direct investment can also be a financial asset, and if this investment is 10 percent or more of the value of the voting stock, then it will be considered direct, even if the goal is a higher return. If less than 10 percent of the voting stock of a particular organization are invested, such investments are considered portfolio. While engaging in portfolio investment, using stocks, the investor provides capital in exchange for a predefined payout or return at regular intervals, depending on the profitability of the company being invested in (Dyck et al. 2019). Also, the portfolio investor can expect an increase in value in the future and a more expensive sale of shares than the purchase price. For this reason, these investments also have the name of speculative investments. Portfolio investments can also be made in closed type organizations, but most of them go to organizations openly listed on the stock exchanges.

To attract investment, organizations often decide to trade shares publicly, through stock exchanges. The trading of shares through stock exchanges has greatly contributed to the growth of portfolio investments. However, the trading of shares through stock exchanges is much more strictly regulated than the trading of shares of unlisted companies. One of the main limitations of trading shares through stock exchanges is the lack of connection with the organizational activities. Only those who do not have access to internal organizational information have the right to buy shares. If it is found that the shares were purchased with the knowledge of insider information, this is considered “insider trading” and is a punishable offense eventually leading to imprisonment. Before making a foreign direct investment or a strategic investment in an organization, an investor almost always familiarizes himself with the inside information of the company, because it is important in making the decision to invest and take control of the company. In the case of a foreign portfolio investment, if the investment is made in companies listed on the stock exchange, the only way to get information about the organization is through public announcements officially provided by the organization. However, the public announcement is usually related to the disclosure of historical data – the disclosure of financial results, but data about the company’s weaknesses, strengths, and threats are not really disclosed, and the investor must be guided only by historical data and his own calculations and assessments. Investing in foreign organizations without access to insider information is quite risky, that is why derivatives aggregated products are often offered on exchanges. This means that an investor can invest, not in the shares of a specific company, but, for example, in the aggregated index of all listed companies in a certain sector of that country. An aggregated index is created as a derivative index of the values of shares of several, several dozen or several hundred companies. Investments in aggregate indexes are less risky because they do not depend on the success of a specific organization or casual mismanagement, but on the entire sector. Even if one or a few organizations face very serious issues, this does not necessarily mean that the entire sector gets affected, and the average value of the aggregated index may suffer little or no damage as a result. In this way, the investor becomes protected from the problems of individual organizations. In addition, it is much easier for an investor who does not have inside information about specific companies to evaluate the entire sector, such as the industrial sector, the electronics sector, the high-tech sector, and its development trends, as it is possible to follow the available macro indicators. Portfolio or financial investments are primarily made through financial institutions such as banks and mutual funds.

Investors in the economically developed countries actively trade shares through stock exchanges. For example, the three most famous stock exchanges in the USA – NYSE – New York Stock Exchange, NASDAQ – National Association of Securities Dealers Automated Quotations, AMEX – American Stock Exchange. The history of the stock exchange goes back 18 centuries, when in 1792 when the Buttonwood Agreement was signed between 24 brokers at the Buttonwood tree on Wall Street. Previously, transactions were carried out in stock exchange halls, where market participants gathered. The share trading mechanism operated on the principle of an open auction, the so-called “Open Outcry system”. Sellers call out their offer to sell, and buyers either accept their offer or call out their price to buy.

European countries also have stock exchanges, the largest of which is in France are SBF / PAR – Euronext France Paris, FWBFrankfurt Stock Exchange and IBIS / FSE – Deutsche Borse XETRA in Germany. In Asia, the largest SHEK /HKEX – Hong Kong Stock Exchange, SEHKSZSE – Shenzhen-Hong Kong Stock Connect, TSEJ / TYO – Tokyo Stock Exchange, in Africa – JSE – Johannesburg Stock Exchange, South America – MEXI Mexican Stock Exchange.

Through stockbrokers, investors can purchase shares of companies listed on stock exchanges in various continents. This process is relatively short and fast, thanks to standardized procedures. There were roughly 80 major stock exchanges with a worth of 110.2 US dollars trillion in total in 2023. Top 25 stock exchanges are covering 96 percent of total value (Exhibit 6-4). A most prominent stock aggregated index is that reflect the entire sector or even the share values of all publicly listed companies. For example, technology sector shares are represented by indexes such as NASDAQ, TECDAX30 Germany Technology 30, and US industry – Dow Jones Industrial Average – DIJA.