Equity Investments II
Reading 39. Overview of Equity Securities
Learning Outcome Statements
d. describe methods for investing in non-domestic equity securities;
CFA Curriculum, 2020, Volume 5
Why should I choose AnalystNotes?
AnalystNotes specializes in helping candidates pass. Period.
Subject 4. Investing in Non-Domestic Equity Securities
Investors can buy and sell securities directly in foreign markets. However, they have to worry about currency conversions, unfamiliar market practices, and differences in accounting practices.
Depository Receipts (DRs) are domestically traded securities representing claims of shares of foreign stocks. Those shares are held in deposit in a local bank, which in turn issues DRs in the name of the foreign company. Investors buy and sell DRs in local currency and receive all dividends in local currency.
An unsponsored DR is issued by a broker/dealer or depository bank without the involvement of the company whose stock underlies the DR.
A sponsored DR is issued with the cooperation of the company whose stock underlies the DR. These shares carry all the rights of the common shares, such as voting rights.
A global depository receipt (GDR) is a DR issued outside the company's home country and outside the U.S. A GDR is very similar to an ADR. It is typically used to invest in companies from developing or emerging markets.
An American depositary receipt (ADR) is a U.S. dollar-denominated DR that trades on a U.S. exchange. Sponsored ADRs are classified at three levels:
- A Level I ADR is used when the issuer is not initially seeking to raise capital in the U.S. markets or does not wish to, or can't, list its ADRs on an exchange or on Nasdaq. A Level I ADR program offers an easy and relatively inexpensive way for an issuer to gauge interest in its securities and begin building a presence in the U.S. securities markets. Level I ADRs are traded in the over-the-counter (OTC) market.
- In a Level II ADR program, the ADRs are listed on the U.S. securities exchange or quoted on Nasdaq, thereby offering higher visibility in the U.S. market, more active trading, and greater liquidity. Level II ADR programs must comply with the full registration and reporting requirements of the SEC's Exchange Act.
- In the most high-profile form of sponsored ADR program, Level III, an issuer floats a public offering of ADRs in the U.S. and lists the ADRs on one of the U.S. exchanges or Nasdaq. The benefits of a Level III program are substantial: it allows the issuer to raise capital and leads to much greater visibility in the U.S. market.
- A SEC Rule 144A ADR allows foreign companies to raise capital by privately placing these DRs with qualified institutional investors. SEC registration is not required.
Other methods to invest in non-domestic equity securities include global registered shares and baskets of listed depository receipts.