Global depositary receipts

Definition

Global depositary receipts (GDRs) are financial instruments that allow investors to hold shares of foreign companies while trading them on local stock exchanges. GDRs simplify international investing by enabling investors to buy and sell these receipts, representing underlying shares, without dealing with the complexities of foreign stock markets, currency exchange, or different regulatory environments.

5 Must Know Facts For Your Next Test

1. GDRs are issued in various currencies, allowing investors from different regions to invest in foreign companies without currency conversion issues.
2. They provide an opportunity for companies to raise capital internationally while gaining exposure to new markets and investor bases.
3. GDRs can be listed on multiple exchanges, giving them broader access and increasing their liquidity compared to shares traded only in their home country.
4. Investors in GDRs benefit from the potential for diversification and exposure to emerging markets without the need for direct investment in those markets.
5. GDRs may come with certain risks, including differences in regulatory environments and varying levels of information availability compared to domestic investments.

Review Questions

• How do global depositary receipts facilitate international investment for both companies and investors?
  • Global depositary receipts allow companies to access capital from international markets while simplifying the process for investors who want to invest in foreign firms. By issuing GDRs, companies can list their shares on multiple exchanges, which can increase liquidity and attract a broader range of investors. For investors, GDRs offer a way to gain exposure to foreign companies without the complexities of dealing directly with foreign stock markets or currencies.
• Evaluate the advantages and disadvantages of using global depositary receipts compared to direct investment in foreign stocks.
  • The advantages of using global depositary receipts include ease of access to foreign investments, reduced currency risk, and enhanced liquidity due to listing on local exchanges. However, there are disadvantages such as potential regulatory differences, limited information on the underlying companies compared to domestic firms, and fees associated with GDR transactions. Investors must weigh these factors when deciding between GDRs and direct investments.
• Assess how global depositary receipts impact the strategies of multinational companies seeking to raise capital and expand their market presence.
  • Global depositary receipts play a critical role in the strategies of multinational companies by providing a flexible mechanism for raising capital across borders. By issuing GDRs, these companies can tap into diverse investor bases and access funding without needing a physical presence in every market. This flexibility supports their growth strategies, allowing them to enter new markets more easily and respond quickly to changing economic conditions while managing risks associated with currency fluctuations and differing regulations.

Related terms

American Depositary Receipts:

American depositary receipts (ADRs) are similar to GDRs but specifically represent shares of foreign companies traded on U.S. exchanges.

Depositary Bank: A depositary bank is a financial institution that issues GDRs and manages the underlying shares, handling aspects such as record-keeping and distributions to investors.

Dual Listing: Dual listing occurs when a company lists its shares on more than one stock exchange, enabling greater access to capital markets and investor pools.