Understanding How Exchange Rates Affect Your US Stock Investments

Investing in US stocks from Korea can be a great way to diversify, but it’s not just the stock’s performance that matters. The exchange rate between the Korean Won (KRW) and the US Dollar (USD) plays a significant role in your actual returns. I’ve seen this firsthand; even when my US stock was up in dollar terms, the evaluation amount in my brokerage account sometimes showed a slight gain or loss that didn’t perfectly match the stock’s price movement. This is often due to how the brokerage calculates your holdings, and the exchange rate is usually the main culprit.

How Exchange Rates Impact Your Returns

When you buy US stocks, you’re essentially buying dollars first to make the purchase. Let’s say you bought a stock at $100 when the exchange rate was 1,200 KRW to 1 USD. Your cost in KRW would be 120,000 KRW (plus any fees). Now, if the stock price stays at $100, but the exchange rate shifts to 1,150 KRW to 1 USD, your investment is now worth 115,000 KRW if you were to convert it back. Even though the stock’s dollar value hasn’t changed, your KRW-denominated return would appear to be a loss.

Conversely, if the stock price goes up to $110 and the exchange rate moves to 1,250 KRW to 1 USD, your investment is worth 137,500 KRW. This is a combination of the stock’s price increase and the favorable exchange rate.

This is why sometimes you might see your ‘valuation amount’ in your Korean brokerage account (like Namu Securities in the example) show a positive or negative figure that seems a bit off from the stock’s direct price change. It’s usually because the system is factoring in both the current stock price and the prevailing exchange rate used for that specific calculation, which might be based on your original purchase price or a current market rate. It can be a bit confusing to track precisely, especially when you just want to see the stock’s performance in dollars.

When to Consider the Exchange Rate

1. Entry Point: If you anticipate the KRW will strengthen against the USD (meaning 1 USD buys fewer KRW), buying US stocks might be more advantageous in the long run because your investment will be worth more KRW when you eventually sell. However, predicting currency movements is notoriously difficult.

2. Exit Point: Similarly, when you decide to sell your US stocks and bring the money back to Korea, the exchange rate at that moment will significantly impact how much KRW you actually receive. A strong dollar at the time of sale means more KRW for your dollars.

3. Dividend Payments: Dividends paid in USD will also be subject to the prevailing exchange rate when they are converted into KRW and credited to your account.

Practical Considerations and Limitations

• Brokerage Calculation Methods: Different brokerages might calculate your unrealized gains and losses slightly differently, often involving the exchange rate. It’s worth checking your brokerage’s FAQ or customer service if you find the valuation figures confusing. Some might use the original purchase exchange rate, while others use a current rate.
• Currency Hedging: Some advanced investors might consider currency-hedged ETFs or strategies, but for individual stock investors, direct currency hedging is usually complex and costly. For most retail investors, it’s about understanding the impact rather than actively hedging.
• Market Volatility: Both stock markets and currency markets can be volatile. Relying solely on currency movements for profit can be risky. It’s usually best to focus on the fundamental performance of the companies you invest in.
• Transaction Costs: Remember that converting currencies incurs fees. When you initially buy USD or when you convert USD back to KRW, there will be exchange fees and potentially wire transfer fees, which add to your costs.

Ultimately, while the performance of the US company is primary, the exchange rate is a very real factor that influences your final return in Korean Won. It’s something to be aware of, especially when looking at your overall investment portfolio.