Investing in foreign currencies

Reaper

Not quite. In a perfect world both share prices and currencies will be priced with all known risk factors included, but the difference is dividends. Companies ought to be paying out some of their profits to shareholders (though in the current climate that has been cut right back). You may sell your shares for more or less than you bought them for but at least in the meantime you have been earning from them. That is not true of holding cash.

That's why I prefer the idea of investing abroad. It is high risk but the expectation of returns separates it from currency speculation which I consider a straight forward gamble (at least for anybody other than professional traders).

arcadia00

Reaper wrote: »

Not quite. In a perfect world both share prices and currencies will be priced with all known risk factors included, but the difference is dividends. Companies ought to be paying out some of their profits to shareholders (though in the current climate that has been cut right back). You may sell your shares for more or less than you bought them for but at least in the meantime you have been earning from them. That is not true of holding cash.

The share price will drop by the value of the dividend, they're not some free lunch.

Reaper

The share price doesn't experience a permanent drop after a dividend pay out. You can expect it to rise as each dividend date approaches and fall after it has passed. It makes no real difference to the underlying share price so yes, it is a free lunch.

nrsql

Reaper wrote: »

Not quite. In a perfect world both share prices and currencies will be priced with all known risk factors included, but the difference is dividends. Companies ought to be paying out some of their profits to shareholders (though in the current climate that has been cut right back). You may sell your shares for more or less than you bought them for but at least in the meantime you have been earning from them. That is not true of holding cash.

That's why I prefer the idea of investing abroad. It is high risk but the expectation of returns separates it from currency speculation which I consider a straight forward gamble (at least for anybody other than professional traders).

That's called the perfrect market.
To be perfect the dividend payments will be priced into the share price so you won't do any better than buying currency. The price of the share (and value) is uncreased due to the dividends. You lose out on compounding if you don't reinvest the dividend.
You may get a better return due to a higher risk associated with the dividend payment but similarly you might get better returns from a higher risk currency.

gozomark

Reaper wrote: »

The share price doesn't experience a permanent drop after a dividend pay out. You can expect it to rise as each dividend date approaches and fall after it has passed. It makes no real difference to the underlying share price so yes, it is a free lunch.

sorry, but it isn't

Reaper

I'm trying but struggling to understand the other points of view. Let's ignore the fact we are talking about foreign invetments and start with the UK.

If I take £100 cash and stick it under the mattress for a year I end up with £100.
If I take £100 and buy shares which are paying a fairly consistent quarterly dividend of £5 then sell them at the end of the year for £100 again I now have £120.

If you accept that then move onto the next step where the money I stick under the matress is Euros or the shares I buy is a German company. It makes no difference. I'm still better off buying shares, though I accept the risk is higher as both currency fluctuations and company peformance can affect the outcome.

nrsql

>> If I take £100 and buy shares which are paying a fairly consistent quarterly dividend of £5 then sell them at the end of the year for £100 again I now have £120.

But if you sell it for £80 you end up with £100.

If you buy Euros for £100, the Euro increases by 20% against sterling you end up with £120.

This is ignoring any interest you get on the currency which you would presumably hold in an interest bearing account.

The idea of the perfect market is that everyone has all the information and acts accordingly.
So if you could get £120 from a £100 share investment without risk but less from all other investments then people would buy the share and it would rise in price until it's profit matched other investments.

Reaper

Your example takes the worst case for shares and best case for currency. If future dividends looked set to continue at the same rate there is no reason the share price would drop.

However I do accept your point that if the dividends were paid consistently over a long period of time then the share price would be higher at the point I first bought them and the return would therefore be much less.

An interesting discussion though I think we rather strayed from the original question!

gozomark

Reaper wrote: »

If future dividends looked set to continue at the same rate there is no reason the share price would drop.

there is if its not making enough profit to cover the dividend

nrsql

Reaper wrote: »

Your example takes the worst case for shares and best case for currency.

Nope - you were taking an undervalued share and overvalued currency. To treat them similarly:

£100 share - £5 quarterly divendend reinvested = 121.55

£100 currency + intrest accrued + increase/decrease against sterling = 121.55

£100 sterling + interest accrued = 121.55

If you ignore risk by definition in a perfect market these must give the same return - any imbalances would be flattened by investors moving their money.

It's dangerous to assume that dividends are paid out and there will be no movement in the underlying share price. A dividend is paid out of the company profits, this money is not invested back into the company and this may be to it's detriment and so lower the share price. Some companies are forced to deliver higher than warranted dividends as that's what shareholders expect.