Global Depository Receipts allow you to trade international companies via your UK broker.
Fancy taking a stake in India's giant Tata Steel? Or Korean tyre manufacturer Kumho Tire? Or the Commercial Bank of Qatar? Or, for that matter, any one of many other interesting-looking stocks from emerging market nations?
The good news: it's perfectly possible to do so without trading on the stock exchanges of Mumbai, Seoul, or Doha -- in fact, a call to your usual broker should do the trick, although on-line dealing might prove a little more problematic.
They're all, in fact, listed in London -- although not in the form of ordinary shares, traded in pounds.
Instead, the trick is performed through the magic of Global Depository Receipts -- a vehicle for enabling overseas companies to gain access to London's pool of liquidity, whilst giving investors greater exposure to emerging markets. In short, as Star Trek's Dr McCoy might observe, "They're shares, Jim -- but not as we know them."
American Depository Receipts
Readers whose interest in the markets goes back to the 1980s or before will probably recall American Depository Receipts, which many British companies were involved in issuing in order to gain access to American markets.
Bundles of shares held on deposit, and sold and traded in dollars, American Depository Receipts are certificates of ownership -- generally issued by an American bank -- that have the advantage of appearing to American investors exactly like American stocks.
Previously, an American investor who wanted to invest in a British or European stock would have required a local broking account to do so, giving them potentially unwelcome exposure to strange taxation regimes and currency fluctuations. The result: many didn't, preferring to stick with American companies instead.
American Depository Receipts allowed them to buy shares exactly as they would normally do, together with their associated dividends and voting rights. For example, British Airways (LSE: BAY) and gas explorer BG Group (LSE: BG) trade in the United States as American Depository Receipts.
Global Depository Receipts
Global Depository Receipts are a more recent development, but work in exactly the same way. Here in the UK, the issuing banks are usually British (or at least have a London presence), and the stock exchange is our own LSE, but otherwise the principle is the same. As with American Depository Receipts, though, the currency of issue is US dollars, not pounds sterling.
That said, the Global Depository Receipts of foreign firms are traded on more than one of London's markets -- typically either the main market or the professional securities market. As with British-based stocks, the trading platform of choice depends on the firm's size, the extent to which it meets a given market's listing and regulatory requirements, and its own preferences.
Tata Steel -- whose $500 million Global Depository Receipt offering was India's largest in London -- is one of over 50 Indian companies traded on the London market. Most trade on either the main market or the professional securities market, with the remainder opting for AIM.
What it means
When it comes to emerging markets, I still think funds and ETFs offer more diversified access, even if one does have to pay a fund manager or ETF provider for the privilege. Buying individual emerging market stocks isn't for novice investors, that's for sure.
But there's equally no doubt that Global Depository Receipts provide a low-cost route to those stocks for investors who are willing to take the plunge. Buy a few, and you've even got your own mini-fund, stuffed with just the stocks that you want to own a piece of.
Do you hold any Global Depository Receipts in your portfolio? Why not post a comment below, if you do...
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