Along with the technological advancements in recent decades, it has become significantly easier for investors to make international investments at low costs. Similarly, international issuers are now more capable of raising money from foreign investors. This increase in global investment has allowed many emerging markets to develop and stabilize their economies. Investments in non-domestic equity securities can be made directly or through depositary receipts, global registered shares, or baskets of listed depository receipts.
Direct investing involves buying and selling securities directly in foreign markets, meaning that all the transactions are in the company’s, not the investor’s, domestic currency. Investing directly in foreign securities may result in less transparency and more volatility as audited financial information may not be provided and the market may be less liquid.
A depository receipt is a security that trades like an ordinary share on a local exchange and represents an economic interest in a foreign company. A depository receipt is created when foreign equity shares are deposited in a bank that then issues receipts that represent the deposited shares.
Depository receipts sponsored by the issuing company grant investors the same rights as direct owners in common shares and are usually more regulated, while unsponsored receipts do not give investors voting rights. There are two main types of depository receipts:
- Global Depository Receipt (GDR): issued outside of the company’s home country and outside the United States. GDRs are not subject to foreign ownership and capital flow restrictions that may be imposed by the issuing company’s home country. The majority of GDRs are denominated in US dollars.
- American Depository Receipt (ADR): a US dollar-denominated security that trades like a common share on US exchanges. There are four primary types of ADRs, with each type having different levels of corporate governance and filing requirements.
Global Registered Share (GRS)
A global registered share is a common share that is traded on different stock exchanges around the world in different currencies. GRSs are more flexible than depository receipts because they represent an actual ownership interest and can be traded anywhere without currency conversion.
Basket of Listed Depository Receipts (BLDR)
A BLDR is an exchange-traded fund that represents a portfolio of depository receipts. These securities can allow investors to gain broader exposure to a foreign market and can be easily implemented into hedging or arbitrage trading strategies.
You’re an investor based in the US who wants to invest in non-domestic equity securities without exchanging your US dollars for foreign currency. What type of investment should you avoid?
A. Direct investments
B. American depository receipts (ADR)
C. Global registered shares (GRS)
The correct answer is A.
You can buy ADRs and GRSs with your US dollars, but cannot make direct investments in foreign equities without first converting your currency.
Reading 39 LOS 39d:
Describe methods for investing in non-domestic equity securities