Trading International Stocks and ADRs

For decades, international stock trading was the domain of large institutions and full service brokerage houses, generally for the wealthy.

But today, average, retail stock traders seeking to trade stocks in international markets have a myriad of choices and methods of access.

Trading outside of the U.S. borders offers the savvy stock trader diversification, the ability to access opportunities in emerging markets, the ability to trade active stocks at any time of the day or night, and as well as the potential to benefit from favorable exchange rates.

There are two main ways for the U.S. based trader to access international markets: directly through certain brokers and via ADRs. This article will explain the benefits and pitfalls of each method of accessing and trading the potentially lucrative and exciting stocks the trade in the international stock markets.

American Depository Receipts

ADRs or American Depository Receipts were created to allow international companies the ability to access U.S. capital markets. International companies can either list on the over-the-counter market (OTC) or through one of the large exchanges like the NYSE or NASDAQ.

It's important to note that OTC ADRs are subject to much less regulatory scrutiny than are the ADRs at the major exchanges. Therefore, OTC-traded ADRs may present greater risk to the trader or investor.

There are over 1,500 international companies that trade in the U.S. as ADRs. And it's not just obscure, foreign stocks that trade as ADRs, either. Many of the biggest, most widely traded ADRs are in companies and corporations who are household names like Nestle (NSRGY | Quote | Chart | News | PowerRating), Rolls Royce (RR | Quote | Chart | News | PowerRating), Nokia (NOK | Quote | Chart | News | PowerRating), Sony (SNE | Quote | Chart | News | PowerRating), and Glaxo Smith Kline (GSK | Quote | Chart | News | PowerRating).

ADRs are traded in U.S. Dollars and represent a fixed number of shares held by the issuing bank. ADRs are the easiest way for the US based investor to access international markets. They eliminate the sometimes higher cost of trading directly into international stock exchanges, avoid potentially negative exchange rates, and often offer less political/economic risk than direct investments.

Trading Globally

The ability for the average investor to directly access international stock exchanges is relatively new. The primary, popular brokers who offer this access are E trade, Charles Schwab, Fidelity and Interactive Brokers (IB).

Each brokerage is different in terms of the access it provides, and different brokerages will have specialties in different countries or regions - although there is much overlap.

E Trade is often recommended to traders because of the brokerages ease of use, friendly staff and educational resources. Interactive Brokers is preferred by many, especially if rock bottom commissions and the ability to access the widest number of exchanges/markets are your goals.

When trading in international stock markets its important to keep in mind exchange rates, differing trading hours, and the potential difficulty in accessing immediately critical news on your stock. Right now, India and China Shanghai exchanges appear to offering great opportunities for the savvy trader interested in trading across borders.

Whether you access international markets directly through brokers or simply rely on ADRs, both approaches have their benefits and pitfalls. ADRs are easier to use than going directly into foreign exchanges, but they sometimes lack the complete diversification and number of different stocks available when trading through a broker. In my opinion, India and Shanghai are offering international stock traders great opportunities right now. For those traders ready to look overseas for stock opportunities and considering direct trading and investment, these are two exchanges that should be at or near the top of the list.

Good Luck!

For more trading strategies, go to TradingMarkets.com/reports.

Dave Goodboy is Vice President of Marketing for a New York City based multi-strategy fund.