| Answer: Dear Ted,
Chuck and I are delighted that you're enjoying our articles/columns. It's a pleasure to write for such savvy, curious BUYandHOLD investors, like you. Chuck is right in advising you to diversify your portfolio by purchasing well-run American Depository Receipts or ADRs. ADRs give U.S. investors an easy, convenient way to invest in foreign securities without having to worry about all the hassles that come with foreign transactions.
WHAT ARE ADRs?
ADRs have been around a long time. J.P. Morgan issued the first one in 1927, so Americans could invest in the British retailer, Selfridges.
ADRs are actually Receipts representing shares of a publicly traded foreign company -- shares that have been placed with a custodian bank. Once the shares are with the custodian, a depositary bank, such as Citibank, the Bank of New York or J.P. Morgan, issues Depositary Receipts. These Receipts, backed by the foreign shares on deposit, trade in the U.S. like other securities.
$TIP: In reality, the process is slightly more complicated than we have space for here. If you're interested in how the entire, rather lengthy process works, click on http://www.bankofny.com/adr. The Bank of New York's website spells it out -- in what might seem to some people, excruciating detail.
ADRs can be listed on any of the U.S. exchanges, including the NYSE and the AMEX as well as on the National Association of Securities Dealers Automated Quotation System (NASDAQ). They can also be privately placed and traded as Rule 144A securities. (Rule 144A is explained on the Bank of New York's website.)
Keep in mind that each ADR is backed by either a specific number or by a fraction of shares of/in the foreign company. This decision is made by the depositary bank. It aims to set the ADR price so that it's comparable to that of shares of other U.S. securities in the same industry and falls within a price range that American investors are comfortable with. (Technically speaking, the relationship between the number of ADRs and the number of foreign shares is called the ADR ratio.)
THE ADVANTAGES OF ADRs
(1) ADRs enable you to diversify your portfolio, as Chuck Carlson recommends -- by owning some shares in solid, blue chip foreign stocks.
(2) ADRs also enable you to make your investment in an efficient way -- certainly much more efficient than going directly to a foreign stock market. You don't have to jump over the various hurdles that come with direct international investing - hurdles which can be expensive, frustrating and very time consuming.
(3) With ADRs, you bypass confusing tax rulings.
(4) Because ADRs are traded as U.S. securities, they are covered by our securities regulations, with the SEC overseeing their public disclosure.
(5) The price for an ADR is always quoted in U.S. dollars.
(6) Any dvidends are paid out are in U.S. dollars. These distributions are converted into dollars at competitive foreign exchange rates.
(7) The information you receive, including proxy material, is written in English.
(8) ADRs also are appealing to foreign investors. Let's say an investor in Japan wants to buy shares of an Argentinean stock. It's generally easier for the Japanese investor to buy the US traded ADRs than to deal directly with the Argentine market.
YOUR CHOICES
Depending upon who you talk with and when, there are anywhere between 1,500 and 1,600 ADRs, representing 50 to 60 countries.
Here are 12 ADRs for companies that are household names. (This list is not a recommendation but merely to give you an idea of the foreign blue chip type stocks are available. There are also, obviously, ADRs for hundreds of less well known companies.)
Amway Japan
Barclays Bank
British Airways
Credit Suisse Group
Daimler-Benz
Fiat
L'Oreal
Nestle
Nokia
Peugeot Citroen
Quantas
Volkswagen
We've made it easy for you to purchase ADRs here at BUYandHOLD through an arrangement with Citibank. To purchase ADRs, simply look in our Research Stocks section - they are listed along with our regular selection of stocks. Plus, at BUYandHOLD, there are no additional fees involved in purchasing an ADR. When you purchase an ADR on this site, you will receive the company's annual report and other material from ADP on behalf of BUYandHOLD.
THE POSSIBLE RISKS INVOLVED
Although ADRs are U.S. dollar denominated securities, they do not eliminate the currency risk associated with investing in a foreign company. A strong dollar, for example, could cause an ADR to decline in price even if the company is prospering.
$TIP: I recommend that you begin by purchasing ADRs that list on the major exchanges -- they are required to follow our accounting rules, known as GAAP or Generally Accepted Accounting Principles, and they must file documents with the SEC.
And, take time to research the companies just as though they were U.S. owned and operated. Check the financial news (online and in print form) as well as possible websites for company's in which you're interested. Many of the larger corporations also have investor relations' offices in the U.S. and will send you their annual report and other information. And, of course, consult one of my favorite research tools, "Value Line Investment Survey." It evaluates many of the larger ADRs.
Good luck!
Nancy |
