Emerging Market

Emerging markets typically have lower incomes per person than developed countries but faster economic growth, expanding middle classes and developing financial markets. Large examples have often included countries such as China, India, Brazil, Indonesia, Mexico and South Africa, although classifications change over time.

Index providers decide which countries count as emerging, developed or frontier markets, based on factors such as economic development, the size and liquidity of their stock markets, openness to foreign investors and the reliability of their market infrastructure.

Investors are attracted to emerging markets for their growth potential and for diversification. For example, a global investor might put a portion of their equity portfolio into an emerging markets fund to gain exposure to faster-growing economies.

Emerging markets also carry higher risks. These include political instability, weaker legal protections, less transparent companies, currency volatility, capital controls and greater sensitivity to global interest rates and commodity prices. Their stock markets have historically been more volatile than those of developed countries.

Many investors access emerging markets through diversified funds rather than individual shares, to spread these risks.