The current prevailing floating exchange rate monetary system provides investors with global stock investment and arbitrage opportunities. With the system, many countries allow freely capital mobility invested in one country to others. This is to incentivize the value of the currency of the concerning country together with their economic competitiveness adjustment. We can see US stock market is the most stable growth market in the world. Hence, investors demand the US dollar to purchase US companies’ stocks. To some extent, this will safeguard US dollar value relative to foreign currencies. Moreover, the cross-border foreign exchange market also provides another profit opportunity for traders and investors in the global market.
Global stock investment opportunities
US citizens can invest in the stock market all over the world. This enjoyment is unique to US people. People are questioning why such a policy occurs. Moreover, why global stock investment opportunities are limited. One of the answers will be the US dollar’s power as the world-dominating currency. Investing by the US dollar means that the domestic stock market of a particular country will receive a US dollar inflow. This affects the reserve of US dollar in the country and could influence the smoothness of export and import activities.
Given this fact, it is essential to establish a system that allows people across the globe to invest in the stock market globally. For example, the idea will enable Indonesian citizens to invest in US companies’ stocks; UK’s stock market is accessible for Malaysian people; and Singaporeans would be able to trade in the Canadian stock exchange.
Indeed, the constraint of allotment and stock value will be the problem of this global stock investment. Another issue is the depository matter of transacted stocks, whether they will be restored in the home or foreign countries. The possible solution is a fractional stock policy. It allows people in Indonesia to purchase or sell only, let say, $1.5 or $10 per se rather than 100 shares (1 lot). Even for retail and ordinary investors, the stock market will be very affordable. Meanwhile, domestic securities depository companies will store foreign investors’ transactions. By this method, Malaysian investors purchasing UK company’s stocks will deposit their securities in the UK’s central securities depository.
Arbitrage opportunities provide investors or traders the profit from price differential from a market to others. The opportunities exist commonly in the foreign currency exchange market. For example, a Malaysian investor investing in a US company sold his $10,000 stocks, noting that spot or forward currency market deals with bid and ask spread. To convert the amount of USD into MYR, he should look at the bid of USD against MYR. Let’s say, the bid rate of USD to obtain MYR in Kuala Lumpur is at 4.2 MYR/USD resulting in 42,000 MYR. Meanwhile, the bid rate at the forex market in Riyadh prices is 3.9 SAR/USD, and the ask rate for 1.11 MYR/SAR. This will result in an arbitrage profit for Malaysian investor, whereby 10,000 USD = 39,000 SAR = MYR 43,290. A profit of 1,290 from arbitrage opportunities.
In summary, buying fractional shares could be an alternative for the global investors to invest in the global market. Meanwhile, investors also can apply the arbitrage strategy to get the better rate in the foreign currency exchange.
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