How the Global Stock Market Works

Dec 18, 2020 Investment exchange

Many laymen, thinking about global stock markets, expect something very different from the image of the Warsaw Stock Exchange. But, in fact international stock markets offer very similar investment tools. So, what assets to invest your money in on the WSE, and what about a foreign stock market?

Principles of operation of an international stock exchange

At the very beginning, it should be mentioned that there is no such thing as a single, global stock exchange. The exception is the international currency market, or forex. There are several stock exchanges with international status, the largest of which is the New York Stock Exchange (NYSE), which, as part of NYSE Euronext, is associated i.a. with other companies from Western Europe. There is also a New York-based stock exchange – NASDAQ, which at first was a regulated stock market, based on an over-the-counter (OTC) system of trading, to eventually turn into a somewhat untraditional stock exchange, listing far more companies than the NYSE.

Polish and global stock market – similarities and differences

Each stock market is to some extent similar to the others, because securities are traded on the same principles all over the world. However, there are a few differences.

The first of them being the opening hours. Almost every stock market in the world operates in local time. NYSE trading session opens at 3:30 p.m. and closes at 8:00 p.m. of the winter time in Poland, so when investing on this stock market, you should switch to late evening trading. The London Stock Exchange, which is the largest stock market in Europe, operates within similar hours, with a difference that a trading session is two hours longer. This makes it a more convenient option for Polish investors.

Foreign exchanges also differ in the way dividends are paid. First and foremost, while an investor trading on foreign stock markets usually pays tax at their place of residence, the NYSE dividend tax is deducted in accordance with U.S. law. It is also possible to have dividends paid in the form of stocks, and some companies pay dividends only in this way.

How the global stock market works

Investors trading on global stock exchanges have more indices to choose from, which facilitates technical analysis. As with the WSE, access to the NYSE, NASDAQ or the London Stock Exchange can only be obtained through an appropriate brokerage house. But, in this respect an investor has a much broader choice at NYSE as compared to local stock markets, as NYSE cooperates with approximately 21,000 brokerage houses and other private brokers. This means that the proposed conditions, spreads and the scope of investment tools is better or more extensive than in the case of the Polish stock exchange. Also, bear in mind that all new investment tools or derivatives (such as options or contracts) first appear on large foreign stock markets. So, investing in them is a good way of getting to know what’s new.

What to invest in on the international stock market?

There is no clear answer to that question, especially when dealing with the largest companies on the global market. First, you need to be aware of the fact that the U.S. and Western European markets are the ones that are most vulnerable to financial crises. The 2008 crisis, which affected Poland only to a slight extent, caused an immediate drop of almost 40% in the S&P500 index. This is because the largest companies gain value evenly and continuously, but lose value suddenly due to political or economic complexities.

So, what to invest in when trading on foreign stock markets? Unless we are talking about day trading, which always follows very occasional current trends, it is recommended to invest in companies that are only just gaining importance in the market. They can actually offer a significant increase in the value of their shares.

Is investing in foreign stock markets better and more profitable than trading on local stock exchanges? Global stock markets generate several problems, such as the possibility of double taxation or currency exchange losses. So, in the end, it all boils down to deciding for oneself what investment actions are most profitable at the moment, and sticking to one’s strategy.

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