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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 representing the deposited shares.
Depository receipts sponsored by the issuing company provide investors with the same rights as direct owners of common shares. These receipts are generally subject to more regulations. In contrast, unsponsored receipts do not grant investors voting rights. There are two primary types of depository receipts:
A global registered share is a common share 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.
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 easily implement hedging or arbitrage trading strategies.
Question
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?
- Direct investments.
- Global registered shares (GRS).
- American depository receipts (ADR).
Solution
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.