A foreign portfolio investment is a grouping of assets such as stocks, bonds, and

cash equivalents Cash and cash equivalents (CCE) are the most liquid current assets found on a business's balance sheet. Cash equivalents are short-term commitments "with temporarily idle cash and easily convertible into a known cash amount". An investment norma ...

. Portfolio investments are held directly by an investor or managed by financial professionals. In

economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics anal ...

, foreign portfolio investment is the entry of

funds Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm use ...

into a country where foreigners deposit money in a country's

bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital m ...

or make purchases in the country's

stock In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a compan ...

and

bond market The bond market (also debt market or credit market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, bu ...

s, sometimes for

speculation In finance, speculation is the purchase of an asset (a commodity, goods, or real estate) with the hope that it will become more valuable shortly. (It can also refer to short sales in which the speculator hopes for a decline in value.) Many ...

Synopsis

Most foreign portfolio investments consist of securities and other foreign financial assets that are passively held by the foreign investor. This does not provide the foreign investor with direct ownership of the financial assets and can be relatively liquid depending on the volatility of the market that the investment takes place in. Foreign portfolio investments can be made by individuals, companies, or even governments in international countries. This type of investment is a way for investors to diversify their portfolio with an international advantage. Foreign portfolio investment shows up in a country's capital account. It is also part of the balance of payments which measures the amount of money flowing in and out of a country over a given time period. Foreign portfolio investment is similar, but differs from foreign direct investment. In foreign portfolio investment the investor purchases stocks, securities and other financial assets but does not actively manage the investments or the companies that are issuing the assets. So, in FPI the investor does not have direct control over the securities or businesses. This means that FPI tends to be more liquid and less risky than FDI. The relatively high liquidity of FPI's makes them much easier to sell than FDI's. Foreign portfolio investments also tend to have a shorter time frame for returns than foreign direct investments. Some benefits that come to investors from utilizing foreign portfolio investments include: *Portfolio diversification: FPI gives investors a fairly simple way to diversify their portfolio internationally. *International Credit: FPI gives investors a larger credit base because they are able to access credit in the foreign countries that they have large amounts of investment in. *Benefits from the Exchange rates: If an investor has an FPI in a foreign country with a stronger currency than their own country the difference in exchange rates between the two countries can benefit the investor *Access to a larger market: Often markets may be larger and less competitive outside of ones home country. For example, the market is much more competitive in the United States of America than in other less developed economies. Investors can take advantage of the less competitive markets internationally by using these Foreign portfolio investments. Portfolio investments typically involve transactions in securities that are highly liquid, i.e. they can be bought and sold very quickly. A portfolio investment is an investment made by an investor who is not involved in the

management Management (or managing) is the administration of an organization, whether it is a business, a nonprofit organization, or a government body. It is the art and science of managing resources of the business. Management includes the activitie ...

of a company. This is in contrast to

direct investment A foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business in one country by an entity based in another country. It is thus distinguished from a foreign portfolio investment by a notion of direct c ...

, which allows an investor to exercise a certain degree of managerial control over a company. Equity investments where the owner holds less than 10% of a company's shares are classified as portfolio investment. These transactions are also referred to as "portfolio flows" and are recorded in the financial account of a country's balance of payments. Portfolio flows arise through the transfer of ownership of securities from one country to another. Foreign portfolio investment is positively influenced by high rates of return and reduction of risk through geographic diversification. The returns on foreign portfolio investment can come from interest payments, non-voting dividends, increases in the market value of securities held in the portfolio, the foreign currency becoming stronger relative to the home currency, or some combination of the previous factors.

References

{{DEFAULTSORT:Foreign Portfolio Investment Financial economics Investment International finance

Synopsis

See also

References