These days you can trade anything and anywhere you want. We have more opportunity than ever to choose exactly what we want for our portfolios. Buying foreign stocks is one of those opportunities but most individual investors still shy away.
Currency conversion, different reporting standards and higher transaction costs are among the barriers to buying stocks in a foreign country.
But let's say you still want to buy stocks overseas. What is the fastest way to do this?
Well you may want to consider American Depository Receipts (ADR's).
What is an ADR? An ADR is a certificate that represents ownership in shares of foreign stock. The underlying security is held overseas by an American depository bank. Denominated in dollars, ADR's trade on U.S. stock exchanges and also the OTC (over the counter) market.
So there are 3 different levels of ADR's, and each has different degrees of transparency.
Level 1: Level 1 has minimal SEC reporting requirements and compliance with GAAP (Generally Accepted Accounting Principles) is not required.
Reasons companies issue Level 1 ADR's include:
1) To measure trading interest but not raise capital.
2) Build brand identity in the U.S. without GAAP or regulatory compliance
3) Maybe the company doesn't qualify for listing on formal exchanges
4) A starting point - then they look to move on to level 2 or 3 once requirements are met.
Level 2: With higher reporting, Level 2 ADR's offer more visibility. You will also notice more trading volume. Partial compliance with GAAP is required, which helps traders better analyze company's as a whole.
Reasons why companies may issue Level 2 ADR's:
1) Move up from Level 1 after confirming interest in the OTC market.
2) More regulatory and GAAP requirements have been met.
3) Setting up to raise capital at Level 3
Level 3: ADR's at this level must meet SEC reporting and fully comply with GAAP. The depository bank floats the ADR on a major exchange. Level 3 ADR's give foreign companies easy access to U.S. capital markets.
Reasons for issuing Level 3 ADR's include:
1) Officially raise capital
2) Respect and market prestige
3) Access to heavier trading volume
The world of ADR's is quite fascinating, but hopefully we have scratched the surface for those that want to learn more.
