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BTO and STC Your ADRs

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Has the globalization of the world's economy caught your interest? You may want to invest in a foreign company, but that doesn't mean that you want to deal with currency conversions or another country's trading rules. Your desire to invest in a foreign company may not mean that you want to hunt down a brokerage in that company's home country, either.

ADRs or American Depository Receipts offer U.S. investors a vehicle for participating in growth opportunities in a foreign company through their regular brokerage accounts, collecting dividends and capital gains in U.S. dollars rather than in the foreign currency. The process works this way: first a foreign company decides that rather than list on the U.S. exchange in addition to its home exchange, it will sell a certain number of its shares to a foreign branch of a U.S. depository bank such as JP Morgan. That bank holds or stores those shares, satisfies the SEC by issuing required documentation, and then prints and issues representative certificates. The bank is said to be sponsoring the ADR program. Each ADR may represent one, a fraction of, or several shares of the foreign company's stock, and that relationship is referred to as the ADR ratio. One ADR with which I'm familiar represents five ordinary shares of a U.K. based company's stock, for example.

In the next step in the process, ADRs must then be listed on a U.S. exchange such as the NYSE or AMEX, or quoted for trading on the Nasdaq. Some are also placed privately or traded over the counter. For the ones listed on NYSE, AMEX or the Nasdaq, U.S. investors can buy as they would any share. Limit orders can be placed just as they would be with any U.S. stock. The ADRs can be held at the brokerage in book-entry form or issued to the investor in certificate form.

One recent day when I put in an order to sell some ADRs, I was reminded of one of their shortcomings, however: the low average daily volume on many. I wanted to sell more, but average daily volume for this one was only 27,000. Selling more than a few hundred at a time likely would have depressed prices. Even putting in a limit price required some guesswork as to how much that sell order would depress the bid. Those used to trading a liquid U.S. equity or futures contract must be aware of the pitfalls of trading a less liquid security.

Other risks include geopolitical ones. Holders of Yukos ADRs filed suit in October 2005. They had suffered massive losses when Yukos' Mikhail Khodorkovsky was imprisoned and the company's main production unit was sold in a shakeup that some termed a covert bid to nationalize the company. In addition, although traders don't have to worry about currency conversions when buying an ADR, that doesn't mean that currency issues won't affect the price of the ADR. Weakness in the dollar may inflate the ADR's price while strength might deflate it, so that ADR traders must keep potential currency moves in mind. An additional obvious risk is the difficulty in doing research on some foreign companies. Also, some ADRs are not sponsored by U.S. depository banks, and, although SEC rules appear to be changing, may not have met as stringent of guidelines as others.

Still interested? ADRs are now offered on more than 2,000 foreign companies. Where can you find lists of ADRs? The issuing banks such as JPMorgan, Citibank, The Bank of New York and others offer lists. At The Bank of New York's http://adrbny.com/dr_directory.jsp site, you can select the home country, industry, region, U.S. exchange traded, U.S. depository and sponsored or unsponsored categories, among others to search for an ADR. A search for a mobile telephone companies in China, with a sponsored ADR traded on the Nasdaq, produced three ADRs, for example: China Grentech Corporation Limited (GRRF), Hurray! Holding Company Ltd. (HRAY) and Linktone Ltd. (LTON). (This was a demonstration of how the search engine works and not advice to buy these ADRs that I have not researched.) An Internet search turns up other lists.

Investing in ADRs offers another way to diversify a portfolio, but also offers even more risk than investing in U.S. companies. I only occasionally hold an ADR in my and my husband's portfolio but hope that this summary provides you with an overview of risks and benefits if you're considering doing so.

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