Diversification with American Depository Receipts
By Saghir Aslam
Rawalpindi, Pakistan
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
Because international markets follow different finical cycles than the U.S. market, international investments can make gains while domestic are flat or declining. That’s why global diversification, a strategy of allocating investment dollars among U.S. and international markets, can potentially help investors reduce risk and optimize returns. Although past performance does not guarantee future results, studies have shown that diversifying a portion of your total equity assets into international investments has historically raised overall returns, while reducing the volatility of a portfolio. Even though this would have not been the case in recent years. Our market has not been traditional. We have had a very unique market with only certain stocks going up.
Spanning the Globe to Maximize Returns
World financial markets have undergone profound changes in recent years. For example, the U.S. today accounts for a little than one third of the world stock market capitalization-down from more than two third just decades ago. While U.S. companies continue to offer substantial investment potential for investors, investment opportunities may also reside in the securities of foreign companies.
One of the most continent ways for you to take advantage of these opportunities in through American Depository Receipts or ADRs. ADRs are negotiable certificates that represent ownership of a given number of a shares in a foreign company.
BENEFITS OF ARDs
U.S. investors generally prefer ARDs to actual foreign shares for the following reasons:
ARDs are issued by U.S. banks in the United States and can be brought and solid just like the stocks of U.S. companies. Their price are quoted and their dividends are paid in U.S. Dollars. Many are listed on U.S. stock exchange, with their prices appearing regularly in financial newspapers.
ADR trades clear and settle just as easily as U.S Stock tr4aders, usually within three business days. Investors tend to encounter fewer operational snags when exchanging ADRs than they might outright foreign shares purchase.
- NO FOREIGN EXCHANGE CONCERN
ADRs allow investors to avoid the potential costs and inconvenience associated with foreign exchange transactions. However, fluctuation in the value of the dollar, relative to other currencies, can effort ADRs investment results. Although investors are spread having to translate foreign currencies into U.S. dollars to determine the value of your investment, ARD prices are directly affected by currency fluctuations, as well as other economic and /or political risk specific to the issuing country. Thus, ARDs may confirm better or worse than the underlying shares in the home country market.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)
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