LEARNING TO THINK GLOBALLY in C#.NET

Reader USS Code 128 in C#.NET LEARNING TO THINK GLOBALLY

Often, investors have a choice between buying a company s ADR and its ordinary shares Assuming the company meets the value criteria previously addressed, what is the better way to invest In evaluating the relative merits of ADRs with the direct purchase of ordinary shares, investors should consider a variety of factors Pricing Additional costs may be incurred in creating or canceling ADRs, and these costs could be passed on to the investor For example, the bank issuing an ADR may keep a portion of any dividend as payment for services (This is a disadvantage, of course, but keep in mind that the bank is also performing a major currency exchange transaction that converts the dividend payment from the company s local currency to US dollars The bank transaction can reduce exchange costs significantly for the individual investor) In theory, ADRs are slightly more expensive than underlying ordinaries because ADR prices include holding charges, processing costs, and the market maker s spread (the difference between the prices at which securities can be bought and sold) It s important to know that large price differences between ADRs and underlying shares usually are eliminated quickly by arbitrageurs Sometimes, the use of a single domestic broker in ADR trading actually winds up costing less than purchasing ordinaries with a non-US brokerage firm And non-US investors sometimes buy ADRs to obtain lower commissions and avoid stamp taxes, a duty that may be imposed on the issue and transfer of stocks and bonds Arbitrageurs are professional investors who buy a security in one market and sell it in another to exploit momentary pricing differentials Typically, arbitrageurs employ huge leverage to turn small pricing differences into substantial profits Since arbitrageurs are often brokers or banks, they generally have a lower brokerage cost threshold and a lower fund cost to overcome than does the general public Given their position in the marketplace, arbitrageurs can make a profit by exploiting even miniscule price differences between ADRs and ordinaries Settlement Time Years ago, trades involving ORDs typically took considerably longer to settle than ADRs, sometimes up to 3 months Now, settlement time for most ORDs is generally 2 to 5 days More efficient markets worldwide have greatly reduced the settlement time benefits once linked to ADRs

Convenience Buying ADRs avoids some of the complexities of dealing directly in overseas markets such as different time zones, currency conversions, and language obstacles Investors can deal with their regular broker, paying standard commissions for ADR purchases and sales ADRs are issued by American banks, which can take physical possession of the non-US securities and may be responsible for converting any dividends into US dollars and deducting foreign withholding taxes for investors In addition, with depositary receipts, annual reports and other shareholder correspondence are printed in the language of the country in which they are issued This allows US investors, for example, to readily compare ADR holdings with US investment alternatives ADRs offer other benefits With respect to the collection of dividends, it can be a confusing process with ORDs as regulations differ from country to country In Japan, for example, investors must present certificates of ownership to the company or its agent prior to receiving dividends And in some markets, particularly in Asia, ORDs may only trade in blocks of 500 or 1000 shares ADRs typically can accommodate smaller investments On a related point, the sheer price level of an individual ORD compared to its ADR may be a factor, depending on how much the investor can afford For example, in early 2003, NTT ORDs were trading at $3600 per share Because an NTT ADR represented a claim to only 1/200th of an ORD, the value of a single ADR was merely $18 For investors who want to invest in round lots (or blocks of 100 shares), ADRs may be a more practical alternative Access to Information In some cases, the information flow associated with ADRs is better than ORDs and eliminates the need for costly international communications A minority of the companies with ADRs that trade on US-listed exchanges must file 20-F reports These reports are similar to annual reports required of all US companies The 20-F includes a balance sheet, profit and loss statement, and a statement of cash flows, reconciled to US generally accepted accounting principles (GAAP) In some cases, a cash flow statement may not even be required in the company s home market This in-depth reporting of fundamental traits such as total sales, revenue, and pretax operating income is an important part of evaluating the investment prospects of individual companies Non-US companies without ADRs may not produce the extensive financial reports described above Even if they do, they may not publish them in English, and they may be difficult to obtain