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ADRs & GDRs

. the instruments are known as American Depositary Receipts (ADRs).Depository Receipts  A negotiable financial instrument issued by a bank to represent a foreign company's publicly traded securities.  When the depositary bank is in the U.  Depositary receipts make it easier to buy shares in foreign companies because the shares of the company don't have to leave the home state. European banks issue European depositary receipts. and other banks issue global depositary receipts (GDRs). The depositary receipt trades on a local stock exchange.S. .

Globalization is making it increasingly easy to travel. . now there is an easy way around this through American depositary receipts (ADRs). imagine the commission and foreign exchange costs on an investment in Russia or Indonesia. More than 2.  Investing money in your own country's stock market is relatively simple.ADRs . You call your broker or login to your online account and place a buy or sell order. Investing in a company that is listed on a foreign exchange is much more difficult. However.S. and Canadian investors interested in buying shares.000 foreign companies provide this option for U. correspond and even invest in other countries. Would you even know where to start? Does your broker provide services in other countries? For example.Introduction  Globalization is the dissolution of barriers to trade and the tendency of the world's businesses to integrate customs and values.

U. This is done because the banks wish to price an ADR high enough to show substantial value. bundle the shares into groups. and many would shy away from a company trading for 50 Russian roubles per share. banks simply purchase a bulk lot of shares from the company. ADRs were introduced as a result of the complexities involved in buying shares in foreign countries and the difficulties associated with trading at different prices and currency values. in the home country. American Stock Exchange (AMEX) or the Nasdaq. As a result. an American depositary receipt (ADR) is a stock that trades in the United States but represents a specified number of shares in a foreign corporation. The depositary bank sets the ratio of U.ADRs . then each ADR would represent several real shares. and are issued/sponsored in the U. the majority of ADRs range between $10 and $100 per share. yet low enough to make it affordable for individual investors. For this reason.S. If. This ratio can be anything less than or greater than 1.Basics  Introduced to the financial markets in 1927. which equates to US$1. the shares were worth considerably less.50 per share.S. by a bank or brokerage.  . and reissues them on either the New York Stock Exchange(NYSE). Most investors try to avoid investing in penny stocks. the foreign company must provide detailed financial information to the sponsor bank. ADRs per home-country share. In return.S. ADRs are bought and sold on American markets just like regular stocks.

This type of ADR is listed on an exchange or quoted on Nasdaq. but they also get higher visibility trading volume. Level 3 ADRs are able to raise capital and gain substantial visibility in the U.  Level 2 .  Level 3 .S. Level 1 ADRs are found on the over-the-counter market and are an easy and inexpensive way to gauge interest for its securities in North America. Level 2 ADRs have slightly more requirements from the SEC. .This is the most basic type of ADR where foreign companies either don't qualify or don't wish to have their ADR listed on an exchange. exchange. this is when an issuer floats a public offering of ADRs on a U. Level 1 ADRs also have the loosest requirements from the Securities and Exchange Commission (SEC).S.The most prestigious of the three.Types of ADRs  Level 1 . financial markets.

. They save money by reducing administration costs and avoiding foreign taxes on each transaction.Advantages  The advantages of ADRs are twofold. allowing them to tap into the wealthy North American equities markets.S. Foreign entities like ADRs because they get more U. For individuals. ADRs are an easy and cost-effective way to buy shares in a foreign company. exposure.

bank purchases 30 million shares from Russian Vodka Inc. just like an ordinary stock. is equivalent to US$4. at this time.Price Determination  Let's use an example to give you a better idea of how the ADR process works. but this is not always the case. Russian Vodka already trades on the Russian Stock Exchange at 127 Russian roubles. However. which. This means each ADR share you purchase is worth 10 shares on the Russian Stock Exchange. its price is determined by supply and demand.58. Suppose a recent boom in the popularity of Bloody Mary drinks has increased the prospects for the vodka industry. A quick calculation tells us that the new ADR should have an issue price of around US$45.S.S.S. ADRs tend to follow the general trend of the home country shares.S.58). an arbitrage opportunity may arise. if the U.80 each (10 times $4. Let's say that a U. Once an ADR is priced and sold on the market. Russian Vodka Inc. . market and to tap into the growing demand for vodka. at a ratio of 10:1. price varies too far from the Russian price after taking the currency exchange rate and the ratio of ADRs to home country shares into account. and issues them in the U. wants to list shares on the NYSE to gain exposure to the U.

Risks .

3. dollars or euros. but are offered for sale globally through the various bank branches. 2.S. The shares trade as domestic shares. 4. A bank certificate issued in more than one country for shares in a foreign company. . These instruments are called EDRs when private markets are attempting to obtain euros. The shares are held by a foreign branch of an international bank. A financial instrument used by private markets to raise capital denominated in either U.Global Depository Receipts (GDRs) 1. A GDR is very similar to an American Depositary Receipt.

FCCBs .

Bonds are commonly referred to as fixed-income securities and are one of the three main asset classes. and foreign governments to finance a variety of projects and activities. along with stocks and cash equivalents.  The indebted entity (issuer) issues a bond that states the interest rate (coupon) that will be paid and when the loaned funds (bond principal) are to be returned (maturity date).Bonds: Meaning & features  A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. which are collectively referred to as simply "Treasuries". The main categories of bonds are corporate bonds. Interest on bonds is usually paid every six months (semi-annually). states and U.credit quality and duration . Corporate and municipals are typically in the three to 10-year range. and U. Bonds are used by companies. municipal bonds.  Two features of a bond . notes and bills.are the principal determinants of a bond's interest rate. Treasury bonds. .S. municipalities. Bond maturities range from a 90day Treasury bill to a 30-year government bond.S.

which adds value. the coupon payments on the bond are lower for the company. . which are activated when the price of the stock reaches a certain point.) Due to the equity side of the bond.Foreign Currency Convertible Bonds  A type of convertible bond issued in a currency different than the issuer's domestic currency. but these bonds also give the bondholder the option to convert the bond into stock. thereby reducing its debt-financing costs. (Bondholders take advantage of this appreciation by means warrants attached to the bonds. In other words. The investors receive the safety of guaranteed payments on the bond and are also able to take advantage of any large price appreciation in the company's stock. the money being raised by the issuing company is in the form of a foreign currency.  These types of bonds are attractive to both investors and issuers. A convertible bond is a mix between a debt and equity instrument. It acts like a bond by making regular coupon and principal payments.

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