What are emerging markets?

Emerging markets are economies whose gross domestic product (GDP) is growing at a much faster rate than more developed markets such as the U.S., Germany and Japan.

Stocks in emerging markets often grow at a faster clip than the average stock in a more mature market. Brazil, Russia, India and China—the so-called “BRIC” nations—garner the most attention. But good stocks can be found in other, less populous corners of the globe, including South Korea, Mexico, Turkey, Saudi Arabia and South Africa. The options are numerous for investors willing to explore outside their American bubble.

There are myriad reasons to do so. Investing in emerging markets allows you to invest in countries with double-digit GDP growth—or close to it. At a time when America’s economy is expanding in the low single digits, Japan’s economy is struggling and much of Europe is still buried under a mountain of sovereign debt, emerging markets hold more appeal than ever.

Of course, all these markets come with their fair share of risk. The term emerging is really a euphemism for “underdeveloped.”

Many of these global markets are plagued by political instability, inferior infrastructure, volatile currencies and limited equity opportunities. In addition, some of the largest companies in emerging markets are either state-run or private. There are simply more unknowns when investing in a market that is still developing. And the less you know about a company, the more risk you take on when you invest in it.

One way to curb the risk is to invest in American Depository Receipts (ADRs) traded on U.S. exchanges, which subjects the stocks to strict U.S. requirements.

For some, emerging markets are simply too risky. But for many, the potential for massive rewards is worth the extra risk.

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