Methodology

Stocks

Module 2

In what countries do domestic companies operate in?

Test your knowledge

Company Size

Domestic vs International Firms

The countries that a company operates in can have an impact on the performance of its stock price. Domestic firms only operate in their home country, while international firms operate in multiple countries.

 

The stock prices of domestic firms are influenced a lot by the events that happen in that one country. For example, if interest rates rise in a country, it would have a big impact on the stock price of companies that operate in that one country only.

 

However, such a change is unlikely to influence the stock prices of international companies that operate in that country, as those companies do not have to rely on banks in that country to borrow money. The stock price of global firms tends to be more influenced by global trends. For example, the widespread use of the internet has had a huge impact on the stock price of large retail stores, such as Toys-R-Us – who eventually went out of business in 2018.

What if an international firm only operates in a few countries?

Obviously, international firms don’t always operate on a global scale and may only operate in 2 or 3 countries. In those cases, the stock prices of those companies are influenced equally by the specific events that happen in each of those countries. So, the more countries that a company operates in, the more that they are influenced by global trends, instead of things that happen in specific countries.

 

There are benefits to investing in domestic companies or in international companies that operate in a few countries. These include the investor being more familiar with the company, having a greater understanding of what is going on in those countries and how it will likely affect the company, as well as being able to make a large return in the circumstance where the company grows into a large, global brand.

 

The opposite is true of global companies, where you are unlikely to know how the business is performing in countries that are very unfamiliar to you, with the potential to make abnormally high capital gains being more limited.

Risk in domestic vs International investments

Whether you should invest in domestic or international companies, depends on your investment strategy and tolerance for risk. Very large, global companies tend to be more stable and would be suitable for an investor that doesn’t want to take large risks. Examples would include household names like Coca-Cola, McDonald’s, Apple or Nike.

 

Domestic companies tend to be less stable and more risky, especially as they are exposed to the conditions in one country only. If things go wrong economically in that country, then it can have a huge impact on the stock price of domestic firms.

 

At the same time, domestic firms are suitable for investors that want to try and make large capital gains in their portfolio, which is even more so likely if the domestic company has an ambitious management team. If a domestic company can grow into an international company, it can result in huge profits for early investors. Of course, the downside is that domestic companies are much more risky and are more likely to fail in their growth. A key reason for this being that, what works in one country, doesn’t necessarily work in another.

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