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-- Posted Wednesday, 23 July 2008 | Digg This Article | Source: GoldSeek.com
Clean tech is global, with more public companies headquartered in Europe and Asia than in the United States. And some of the leaders—like Danish wind turbine maker Vestas Wind Systems and German solar panel giant Q-Cells—don’t even list their shares on U.S. exchanges. This complicates things for American investors, but not insurmountably. As with most things that involve the exchange of information, trading foreign stocks is getting easier all the time. Here are some ways to do it:
ADRs
An American Depository Receipt (ADR) is created when a U.S. bank buys a large block of stock in a foreign company and bundles the shares for reissue on a U.S. stock exchange. The stock will have a normal ticker symbol, with “ADR” appended. For example, the Yahoo! Finance listing for Japanese electronics giant Sony looks like this: SONY ADR (NYSE: SNE).
Unfortunately, Sony is one of the exceptions. To qualify for an ADR listing, a foreign company must issue financial reports that conform to U.S. accounting conventions and Securities and Exchange Commission rules. Since the passage of the Sarbanes-Oxley Act in response to the corporate scandals of the 1990s, this is no simple thing. To make it worth the trouble, a company must be big and sufficiently well known to attract large numbers of U.S. investors. This limits the potential field to just a few hundred companies—and the number of those willing to list ADRs is falling rather than rising. Since the beginning of 2007, a growing list of global multinationals, including Vivendi, Suez, Groupe Danone, and LaFarge, have either delisted or announced their intent to delist their ADRs. Currently there are only a handful of major European or Asian clean tech companies with ADRs.
Pink Sheets
Foreign stocks that don’t have ADRs can still be traded in the United States on an exchange called the Pink Sheets, where non-U.S. stocks are assigned five-letter tickers ending in “F,” to denote foreign, and are quoted with a U.S. dollar price. Trading Pink Sheet stocks can be tricky, for a number of reasons. First, the company’s home market—which ultimately determines the value of its stock—might be closed when a U.S. investor places an order, which means the last quoted price may no longer be valid. Second, to place an order here and have it executed there requires that the order cross several desks, racking up fees on each pass. Here’s how it works in practice:
An investor calls his broker and asks to buy 10,000 shares of XYZ, a Hong Kong–based company that doesn’t have a U.S. ADR. The broker calls a “market maker”—a specialized trader who is responsible for executing orders in several stocks. The market maker looks up the price of the stock on her Bloomberg terminal, notes the previous closing price, trading volume, and breaking news, and makes a judgment about how easy it will be to buy the shares when the market opens. Assuming for the sake of simplicity that the stock closed at the Hong Kong equivalent of $1 per share, the market maker quotes a spread of $0.90 to $1.10. That is, she’ll buy the stock for $0.90 a share and sell it for $1.10. The U.S. broker agrees to the $1.10 offer price, and when trading resumes in the foreign market, the market maker buys the stock there for $1.00 and sells it to the U.S. broker for $1.10. The stock goes into the customer’s account, which is charged the standard trading commission. Notice what has happened: The investor thinks he bought the stock at the market price and paid only a commission, but in reality he also paid the spread, an extra $.10 per share, and is down 10 percent the minute the trade is executed. If he later decides to sell, he’ll have to “hit the bid,” which might be 10 percent lower than the current market price. The moral: If you’re going to buy Pink Sheet shares, never do so “at the market” because you’ll end up buying and selling on the wrong side of a very wide spread. Instead, always decide on the price you’re willing to pay and enter a “limit” order in which you offer that price and nothing more. But, of course, choosing a limit price isn’t easy for a stock that’s quoted in a foreign currency on a market that’s closed during U.S. business hours.
Discount Broker with Foreign Access
Brokers recognize both the attraction of foreign stocks and the difficulties they present for the average customer, so some are making it easier. Big discount broker Charles Schwab, for instance, has a Global Investing Services Group that helps clients trade foreign stocks. If a client is interested in, say, wind power stocks, a Schwab broker will print out a list of global wind companies and help narrow the search down to a couple of suitable prospects. Then they’ll execute the trade, on the Pink Sheets if it’s a small order or directly on the relevant foreign exchange if it’s large. Limit orders can be placed in U.S. dollars. According to a Schwab spokesman, “The foreign market maker will see the U.S. dollar limit and when they transact the price they’ll handle the foreign currency exchange, any markups, clearing costs, or settlement costs. The limit price is all you pay in addition to the Schwab commission.” Because of their complexity, foreign stock trades are done over the phone rather than electronically, with the client speaking directly with the trader who’s placing the trade. As part of the same conversation, the trader will also explain the tax implications of capital gains and dividends generated in the foreign market. And after the investment is made, Schwab promises to forward financial reports and other information.
Full-Service Foreign Stock Specialist
You might recognize Peter Schiff from his frequent appearances on CNBC and other media. He’s made a name for himself as a “bear” on the U.S. financial markets, correctly predicting much of the turmoil that was gripping dollar-denominated investments in early 2008. He also owns a brokerage house, Euro Pacific Capital, that specializes in giving U.S. investors access to foreign stocks. Schiff and his brokers trade directly on foreign exchanges for their customers, charging commissions that are higher than the discount brokers but providing all the full-service handholding of a Merrill Lynch. “When I get an order to buy shares in Hong Kong I’ll wait until that market opens and I’ll buy the shares just the way the market maker would. The customer gets the same price the market maker would have gotten,” says Schiff. Another benefit of working with a specialist is the ability to help clients determine the right limit price. “When you trade on the Pink Sheets, there’s no one who understands the markets," says Schiff. "But we specialize in foreign stocks, so my brokers know exactly what to do, how to find the stock, how to get a price, and how to translate the foreign currency price into a local currency. They’ll understand the rules of the exchanges and the hours they trade. They might even be familiar with the stock already and be able to offer an opinion on it.”
Euro Pacific charges a minimum commission of $50 per trade, but beyond that, fees vary based on the size of the order and the amount of advice given. A big order entered by a customer who knows exactly what he wants will have a lower per share fee than a small order from a customer who needs extensive advice.
Global Trading Platform
Most people need help with foreign stocks. For those who don’t, Interactive Brokers offers a very slick universal account (minimum balance $10,000) from which clients can trade foreign and domestic equities, options, commodities, foreign exchange, futures, and bonds. IB isn’t well known among individual investors because it caters to hedge fund managers and other professionals. But it’s been around for 31 years and is very big, handling 700,000 trades per day and 14 percent of the world’s equity options volume. With foreign stocks, “You’re directly connected to more than 70 electronic exchanges around the globe,” says IB spokesman Andrew Wilkinson. On the IB workstation, a customer can look up a stock’s ticker on its home exchange, covert dollars to the requisite amount of foreign currency (on favorable terms, according to Wilkinson), and enter the trade directly. Or the customer can make the trade and let IB handle the currency translation. Here’s a snippet from IB’s web site that illustrates the sophistication of its system: “IB SmartRouting is designed to search for the best price available at the time of your order, and unlike other routers, dynamically route and re-route all or parts of your order to achieve optimal execution. According to The Transaction Auditing Group (TAG), a third-party provider of audit services, Interactive Brokers’ customer equity options orders were improved 14.85 percent of the time vs. an industry improvement rate of 0.57 percent.”
Commissions are very low; the maximum fee for a European stock trade is €29. There are a few downsides, such as an inactivity charge of $10 a month for accounts that generate less than $10 in commissions and interest paid only on cash balances exceeding $10,000. But all things considered, this is a technologically impressive platform with every conceivable capability.
More Choices All the Time
Most U.S. brokers are adding foreign stock trading capabilities, so it’s possible that by the end of 2008, the typical brokerage account will offer many of the services described here. Meanwhile, the Securities and Exchange Commission is easing restrictions on foreign brokers opening U.S. accounts, which might soon allow the leading European and Asian brokerage houses to take on U.S. customers. This site is a good source for more on the subject.
-- Posted Wednesday, 23 July 2008 | Digg This Article | Source: GoldSeek.com
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