SEC SAFEGUARDS
Investing in Foreign Stocks: ADRs and GDRs
By Ryan C. Fuhrmann, CFA
Investing in foreign stocks should be part of any investor's portfolio. Not only does it diversify your holdings, it offers plenty of opportunities to profit from trends and developments outside your home country.
The U.S. currently accounts for nearly half of the world's total stock market value, but that's likely to decline in the years ahead as more investors look to emerging markets such as China and India.
Below is an overview of the easiest ways to invest in foreign stocks, whether you live in the U.S. or any other country.
ADRs (American Depositary Receipt)
It’s important to note that an ADR must be sponsored by the underlying corporation. If not, the security is likely to be traded over the counter, which is considered more risky because there are fewer regulatory requirements.
different levels of sponsored ADRs and U.S. Securities and Exchange Commission (SEC) reporting requirements.
ADRs traded on the US OTC market, using existing shares. Company forms contractual relationship with single depositary bank.
Sponsored Level II
ADRs listed on a recognized US exchange (NYSE or NASDAQ), using existing shares
Form F-6, Form 20-F
Sponsored Level III
ADRs initially placed with US investors and listed on a recognized US exchange (NYSE or NASDAQ)
Form F-6, Form 20-F, Form F-1
Source: Deutsche Bank Depositary Receipt Services
ADRs, like domestic U.S. stocks, have to meet certain SEC filing requirements. An ADRs' annual report is known as a 20-F filing, which is similar to the 10-K filing that U.S.-based companies file annually.
