Refresher Course: Trade The World: An Armchair Travelere's Guide

(From BARRON'S)

The whats, whys and wherefore of basic investment and economic terms and
techniques

If you watched the dollar drop last year, you probably wished you owned some
foreign stocks. Every time the buck's value dips, returns from foreign bourses
are magnified for anyone who keeps score in greenbacks. And economic growth in
some countries is expected to outpace that of the U.S. Fortunately for
Americans, investing in foreign markets has never been easier.
Today, youcan buy American depositary receipts -- certificates that represent
foreign shares -- for more than 2,000 companies in more than 50 countries.
Information about ADRs is plentiful, particularly on two Websites: the Bank of
New York's (adrbny.com) and J.P. Morgan's (adr.com.) You can also get quotes
about many foreign stocks in Barron's and online from sites like Yahoo! Finance
(finance.yahoo.com.)
Thousands of mutual funds focused on non-U.S. shares are available for
purchase, and plenty of advice can be had from brokerage houses (often for a
fee) or on the Internet (frequently free). Exchange-traded funds are another
popular, route to investing abroad; indeed, the iShares MSCI EAFE Index Fund is
the fourth-largest ETF with nearly $9 billion in assets. Information on ETFs is
available at etfconnect.com and Yahoo! Finance.
You don't always have to venture abroad to get foreign exposure. Plenty of
U.S. companies do substantial business overseas, and thus gain when non-U.S.
currencies are strong and profits made overseas are repatriated. Prime example:
UTStarcom, which derives over three-quarters of its revenue from selling
equipment to Chinese telecoms, trades only on Nasdaq.
In addition, the shares of many venerable foreign companies change hands on
U.S. exchanges. Yet directly buying these securities -- what brokers call
"foreign ordinary shares" -- can seem daunting.
Your full-service broker might not know how to do it (yet). In the past,
discount brokers were even worse. Yet there are often good reasons to buy
foreign ordinaries. Some stocks simply aren't available on U.S. exchange. And
sometimes, prices overseas are simply better.
Consider Nintendo, whose stock is listed in Japan. The big videogame outfit
also has ADRs, but they're thinly traded.
Late last year, one Nintendo share fetched the dollar equivalent of $117.04.
There are eight American depositary receipts per share, and at that price, each
would be worth $14.63. Yet the ADRs, which trade over the counter, fetched about
$15. If you bought 125 ADRs at 15 each, and paid a commission of $66.88, the
total cost of the trade would be $1,941.88. If you bought 13 ordinary shares --
a purchase that would entail a higher commission -- the transaction would cost
$1,653.50, in a typical trade calculated by Schwab.
Brokers are making it easier and easier to buy foreign ordinaries. "In the
past, it was very difficult and only the savviest investors did it," says Steven
Chandler, vice president of global trading at Charles Schwab. Yet today, Schwab
has a dedicated trading desk for foreign stocks.
Pricing is in U.S. dollars, using the spot currency rate, and gives a customer
the choice of trading it either at that second or overnight, when the foreign
market is open. Spreads during the U.S. trading day can be wide. Spreads in the
home market are much thinner, and thus so are the prices.
When Schwab first started its global desk, a 10% difference between the bid
and asked price wasn't uncommon. But today, American investors trading through
Schwab overnight probably pay three-tenths to one-half [0.3 to 0.5] of a
percentage point more than a domestic investor. The extra money helps cover
currency exchange, custody fees and the like. By Chandler's reckoning, an
over-the-counter trade during U.S. hours can run you as much as one percentage
point more than a local investor would pay. Still, improvements are such that
"it's almost as easy as buying a stock on the NYSE," Chandler asserts.
Fidelity's discount broker offers independent research on ADRs available from
several research companies, including Prudential, Lehman Brothers, Standard &
Poor's, First Call.
Not taking commissions into account, there's often a disparity between the ADR
and the foreign ordinary price, creating nice arbitrage opportunities for
investors.
Late last year, the ordinary shares of Peninsular & Oriental Steam Navigation,
the British ports and ferries company, fetched the equivalent of $5.90 each. Two
ordinaries equaled one ADR. Yet the ADR traded at $11.95 -- slightly more than
an equivalent amount of ordinary shares.
On the same day, ordinary shares of Johannesburg's Anglo American mining
company cost $35.02. One ordinary equals one ADR. The ADR, however, fetched
$35.25. Meanwhile, SCMP Group, which publishes the South China Morning Post,
Hong Kong's leading newspaper, saw its ordinaries trade at the equivalent of 42
cents each. There are five ordinaries to one American depositary receipt. The
ADR traded at $2.15 -- more than the $2.10 for an equivalent amount of ordinary
shares.
Remember, there are some markets you can't buy into directly -- China's "A"
shares are one good example. India has restrictions on foreign ownership, too.
Also, bear in mind that accounting standards differ among countries. Paul
Graham, senior vice president in Fidelity's brokerage company, is responsible
for the Fidelity.com Website and active-trader services. Graham points out that
there are minimum-lot requirements with some stocks. Shimano, the Japanese
bicycle-parts manufacturer, trades in minimum lots of 100 shares. Noble Group,
the Singapore-headquartered shipping and commodity-trading company, trades in
minimum lots of 1,000.
However easy it is to trade in foreign ordinaries, don't be surprised by costs
you wouldn't find with a standard trade in a U.S. stock. For example, the U.K.
charges a stamp duty on stock purchases. And some overseas markets also withhold
taxes on dividends. You can claim these back on IRS Form 1116.
At Schwab -- which trades in most foreign ordinaries -- if you bought 100
shares at 50 each, the trade might cost you $80. (A Web rate, in contrast, might
cost between $9.95 to $29.95.)
At Fidelity, commission levels for the foreign-ordinary orders hinge on your
trading activity, and can range as low as $8, depending on how active you are.
(Individuals who have $30,000 in assets at the firm and place at least 120
trades a year are considered active traders. People with $1 million in assets at
the company needn't make a specific number of trades to qualify for the low
commission.) You may also have to pay a trading fee: If the security is eligible
to trade through the DTC (Depository Trust Co.), says Fidelity's Graham, then it
can be transferred to another broker electronically, at no extra charge; if it's
not DTC-eligible, that security must be manually transferred, activating a $50
fee in addition to the commission.
Major foreign stocks that aren't DTC-eligible are those of Korea's Samsung
Electronics, the largest company in the emerging markets; Germany's Bayerische
Hypo und Vereinsbank, a big banking concern, and Canada's Great Lakes Hydro
Income Fund, which derives its revenue and earnings from some of North America's
biggest electricity producers.
E*Trade lets you buy foreign ordinaries -- just not online. You can purchase
ETFs, closed-end funds and ADRs listed on U.S. exchanges at online brokers at
the same rates as U.S. stocks.
Not all brokers trade foreign ordinaries yet -- but the universe of those that
do expands every day.
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