ARTICLES
Let’s put cherry (ADR) on chocolate cake (U.S Equities)
By Robin Trehan, B.A, MIB, MBA electronic business
By the end of the 1st quarter of 2006, US investment in
non-US equities totaled $3.27 trillion- up from $19 Billion in 1980.
Foreign shares accounted for Approx 17.5% of total U.S equity
investments as of middle of 2006.
The reason for the increase investment in ADR (American Depository Receipts) is a good sign in terms of risk reduction, diversifying the portfolio across the globe and taking advantage of the global market both in developed and emerging markets. It is true that U.S has excellent companies and bulk of our investment should be done with American companies. In my opinion near about 80% to 85% of the total portfolio should be US based equities and rest in ADRs. American Depository Receipts over the past few years have bypassed US Equities but we need to keep in mind ADRs can have greater price volatility and very high risk factors because of political, exchange rate and inflationary risks.
ADRs were first introduced in 1927 and now there are approximately 460 ADRs preponderance of them trading on NYSE. ADRs are stock that trades in the United States but represents a specified number of shares in a foreign corporation. ADRs are bought and sold on American markets just like regular stocks, and are issued/sponsored in the U.S. by a bank or brokerage. There are three main types of ADR issues:
• Level 1 ADRs - This is the most basic type of ADR where foreign companies either do not qualify or do not wish to have their ADR listed on an exchange. Level 1 ADRs are found on the over-the-counter market. They do not require full compliance with SEC reporting requirements and are exempt from Sarbanes-Oxley financial disclosures. However, Level 1 ADR may not be listed on national stock exchanges or used for raising equity capital.
• Level 2 ADRs – They must comply fully with SEC registration and reporting requirements as well as Sarbanes-Oxley more stringent financial disclosures requirement. Level 2 ADR may be listed on any national stock exchanges but they are usually not used to raise capital.
• Level 3 ADRs – At this level issuer floats a public offering of ADRs on a U.S. exchange. Level 3 ADRs are able to raise capital and gain substantial visibility in the U.S. financial markets. They must comply fully with SEC registration and reporting requirements as well as Sarbanes-Oxley most stringent financial disclosures requirement.
In the end we need to remember that U.S equities are like chocolate cake and ADRs are cherry on top it. Cake has to be good to enjoy the cheery!
The reason for the increase investment in ADR (American Depository Receipts) is a good sign in terms of risk reduction, diversifying the portfolio across the globe and taking advantage of the global market both in developed and emerging markets. It is true that U.S has excellent companies and bulk of our investment should be done with American companies. In my opinion near about 80% to 85% of the total portfolio should be US based equities and rest in ADRs. American Depository Receipts over the past few years have bypassed US Equities but we need to keep in mind ADRs can have greater price volatility and very high risk factors because of political, exchange rate and inflationary risks.
ADRs were first introduced in 1927 and now there are approximately 460 ADRs preponderance of them trading on NYSE. ADRs are stock that trades in the United States but represents a specified number of shares in a foreign corporation. ADRs are bought and sold on American markets just like regular stocks, and are issued/sponsored in the U.S. by a bank or brokerage. There are three main types of ADR issues:
• Level 1 ADRs - This is the most basic type of ADR where foreign companies either do not qualify or do not wish to have their ADR listed on an exchange. Level 1 ADRs are found on the over-the-counter market. They do not require full compliance with SEC reporting requirements and are exempt from Sarbanes-Oxley financial disclosures. However, Level 1 ADR may not be listed on national stock exchanges or used for raising equity capital.
• Level 2 ADRs – They must comply fully with SEC registration and reporting requirements as well as Sarbanes-Oxley more stringent financial disclosures requirement. Level 2 ADR may be listed on any national stock exchanges but they are usually not used to raise capital.
• Level 3 ADRs – At this level issuer floats a public offering of ADRs on a U.S. exchange. Level 3 ADRs are able to raise capital and gain substantial visibility in the U.S. financial markets. They must comply fully with SEC registration and reporting requirements as well as Sarbanes-Oxley most stringent financial disclosures requirement.
In the end we need to remember that U.S equities are like chocolate cake and ADRs are cherry on top it. Cake has to be good to enjoy the cheery!