Emerging MarketsEM
Emerging markets are economies in transition from developing to developed status, such as China, India, Brazil and others. They offer faster growth potential but higher risks, including currency swings, political instability and less mature regulation.
Most global growth now comes from outside the US, Europe and Japan. Emerging markets — fast-growing economies with developing financial systems — offer investors access to that growth, but with bumpier rides. This entry explains what makes a market "emerging", how investors gain exposure and the specific risks involved.
- Category
- Trading Basics
- Reading time
- 3 min
- Also called
- Emerging market, EM, Developing markets
- Updated
Emerging markets in plain words
The MSCI Emerging Markets Index measures stock market performance in emerging countries, covering large and mid-cap companies across many of them.1
Companies operating in fast-growing economies face currency risk, political instability and regulatory complexity.2
Higher growth potential comes with higher volatility. See Volatility.
How to invest in emerging markets, step by step
Choose exposure
Broad index, region or country.
Use funds
EM ETFs or mutual funds. See Exchange-Traded Fund.
Consider currency risk
Local currency moves matter. See Currency Risk.
Check concentration
A few countries dominate indexes.
Size the allocation
Usually a slice of a portfolio. See Diversification.
Expect volatility
Hold for the long term.
Worked examples
Example 1 — Currency effect
≈ +1.2%An EM stock index rises 10% in local currency, but the currency falls 8% against the dollar.
| Dollar return | 1.10 × 0.92 − 1 ≈ +1.2% |
Currency risk is a key challenge in emerging economies.2 See Currency Risk.
Example 2 — Allocation
Diversified EMA $100,000 global portfolio puts 10% into an EM index fund.
| EM allocation | $10,000 |
| Countries covered | Many, via one fund |
Index funds give broad exposure across many emerging countries in one holding.1
Example 3 — Political shock
−25%A surprise policy change knocks a country's market down 25%.
| Loss on $10,000 | −$2,500 |
Political instability is a recurring EM risk.2
Emerging vs developed markets
| Aspect | Emerging | Developed |
|---|---|---|
| Growth potential | Higher | Lower |
| Volatility | Higher | Lower |
| Currency risk | Often high | Moderate |
| Market regulation | Developing | Mature |
Why investors use emerging markets
Growth exposure
Faster-growing economies. See Gross Domestic Product.
Diversification
Different cycles from developed markets.
Commodities
Many EMs are resource exporters. See Commodities.
Valuation
Sometimes cheaper than developed stocks.
Advantages and disadvantages
Advantages
- Higher long-term growth potential.
- Diversification benefits.
- Access via low-cost funds.
Disadvantages
- Higher volatility.
- Currency and political risk.
- Weaker governance in some markets.
Going deeper
Read as far as you need. Each level builds on the one before it.
Index coverage
Beginner
Broad EM indexes like MSCI's capture mid- and large-cap companies across many emerging countries.1 See MSCI Indices.
Business challenges
Intermediate
Multinationals operating in emerging markets must manage currency risk, political instability and regulatory complexity.2
Dollar sensitivity
Advanced
A strong US dollar and rising US rates often hurt EM assets, as dollar debts get costlier and capital flows out. See US Dollar Index.
Common mistakes
Ignoring currency
It can erase local gains.
Over-allocating
Volatility can be severe.
Chasing last year's winner
EM leadership rotates.
Overlooking concentration
A few countries dominate indexes.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Emerging markets are fast-growing, developing economies.
- They offer growth with higher risk.
- Currency moves strongly affect returns.
- Funds provide broad, cheap exposure.
- Keep allocations sized to your risk tolerance.
Frequently asked questions
Which countries are emerging markets?
How much should I invest in EM?
What is a frontier market?
Further learning
- American Depositary Receipt
Buying EM stocks in the US.
- US Dollar Index
How the dollar affects EM.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Corporate Finance Institute. MSCI Emerging Markets Index (opens in a new tab) Checked .
- Corporate Finance Institute. Corporate Finance Explained: Emerging Markets (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.