The Benefits of Global Depositary Receipts II

July 26, 2007 @ 10p.m – Written by January

Category: Investing

While reading the daily papers  today, I discovered that GTB’s GDR listed on the London Stock Exchange has gained 0.10cents. For those of you who don’t have a clue to what a GDR, read my earlier article on this issue.

As from next week, I’ll be highlighting on cheaper stocks we can buy and how to identify a cheap stock.

The GDR functions as a means to increase global trade, which in turn can help increase not only volumes on local and foreign markets but also the exchange of information, technology, regulatory procedures as well as market transparency. Thus, instead of being faced with impediments to foreign investment, as is often the case in many emerging markets, the GDR investor and company can both benefit from investment abroad. Let’s take a closer a look at the benefits:

For the Company
A company may opt to issue a GDR to obtain greater exposure and raise capital in the world market. Issuing GDRs has the added benefit of increasing the share’s liquidity while boosting the company’s prestige on its local market (“the company is traded internationally”). Global Depositary receipts encourage an international shareholder base, and provide expatriates living abroad with an easier opportunity to invest in their home countries. Moreover, in many countries, especially those with emerging markets, obstacles often prevent foreign investors from entering the local market. By issuing a GDR, a company can still encourage investment from abroad without having to worry about barriers to entry that a foreign investor might face.

For the Investor
Buying into a GDR immediately turns an investors’ portfolio into a global one. Investors gain the benefits of diversification, while trading in their own market under familiar settlement and clearance conditions. More importantly, GDR investors will be able to reap the benefits of these usually higher-risk, higher-return equities, without having to endure the added risks of going directly into foreign markets, which may pose lack of transparency or instability resulting from changing regulatory procedures. It is important to remember that an investor will still bear some foreign-exchange risk, stemming from uncertainties in emerging economies and societies. On the other hand, the investor can also benefit from competitive rates the U.S. dollar and euro have to most foreign currencies.

Conclusion
Giving you the opportunity to add the benefits of foreign investment while bypassing the unnecessary risks of investing outside your own borders, you may want to consider adding these securities to your portfolio. As with any security, however, investing in GDRs requires an understanding of why they are used, and how they are issued and traded.