An investor looking at investing in foreign companies can do so in two ways: 1) Direct investing and 2) Depositary Receipts.
Direct Investing
This refers to buying and selling securities directly in the foreign markets. This method of investing has several disadvantages:
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All transactions will be in foreign company’s currency.
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The investor must be familiar with the trading rules and regulations in the foreign market.
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The investor may not be able to conduct thorough analysis of securities if the foreign country’s reporting requirements are less stringent.
Depository Receipts
Deposit receipts make investing in a company beyond the investor’s home borders easy and convenient. A depositary receipt is a negotiable certificate that represents ownership in a foreign firm.
A bank, known as depositary, deposits the shares of a foreign company, and issues shares receipts representing those shares. These receipts are called depositary receipts.