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I live in Australia, and I'm utterly a novice investor, but after ending up with some shares in CYBG after NAB divested itself of its UK business I started thinking/learning about overseas investments.

What is immediately obvious to me is that my dollars buy fewer shares on say the LSE, but that returns in a more valuable currency are effectively multiplied by the difference in value. So on one hand, stocks are more expensive for me, so it would be harder relatively speaking to buy enough of a given stock to benefit from increases in its value; but on the other hand increases in value are "worth more". Which of these two factors is likely to be more significant? Or do they 'cancel out', as one would expect from a naive mathematical perspective, and any risks/opportunities are purely equivalent to those of simply changing my money into the other currency and waiting to see what happens with the exchange rate, added to those associated with the stock (ignoring currency)?

As a worked example, let's say I invested AUD$10k on the LSE. As of today, that's worth £6266.79. Then let's say I get relatively lucky, and make a 5% return on my UK stocks, giving me £6580.13. During that time, the value of the AUD drops by 5%, so if I sell and exchange my pounds for AUD, I end up with AUD$10985.53. To have gotten these returns on the ASX, I'd have needed to get a ~10% return instead, which to me (knowing very little) seems significantly less probable than getting a 5% return on the stocks and a 5% return on the currency exchange. Without enumerating all the possible cases, I realise that I could just as easily have lost 5% on the LSE and made 5% back on the currency, leaving me with my original investment minus various fees; or to have lost 5% on both.

Of course, I know there are peripheral concerns that render foreign exchange trading more expensive/less profitable, such as exchange fees etc; and I understand that it can be more difficult to do successfully, in terms of having less information than one would about the local economy. Those issues aside, am I looking at this in remotely the right way? And (in the most general possible sense) do the relationships between individual stocks and a national economy as a whole, and between national economies and exchange rates, mean that the "middle" case, where I gain on the stock market and lose on the exchange (or vice versa) and end up wasting my time, is less likely (because if stocks rise, then the pound also rises, or vice versa)?

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Which of these two factors is likely to be more significant?

There is long term trend that puts one favourable with other.

.... I realise that I could just as easily have lost 5% on the LSE and made 5% back on the currency, leaving me with my original investment minus various fees; or to have lost 5% on both.

Yes that is true. Either of the 3 scenarios are possible.

Those issues aside, am I looking at this in remotely the right way?

Yes. You are looking at it the right way.

Generally one invests in Foreign markets for;

  • Diversification. i.e. invested enough that you need to diversify more.
  • To Cash in on high growth economies when local economy does not seem to be doing very good.

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