1) American Depository Receipt (ADR):
What Is It?
Introduced to the financial markets in 1927, an American Depository Receipt (ADR) is a stock that trades in the United States but represents a specified number of shares in a foreign corporation. ADRs are bought and sold on U.S. stock markets just like regular stocks and are issued/sponsored in the U.S. by a bank or brokerage. ADRs were introduced in response to the difficulty of buying shares from other countries which trade at different prices and currency values. U.S. banks simply purchase a large lot of shares from a foreign company, bundle the shares into groups and reissue them on either the NYSE, AMEX or Nasdaq. The depository bank sets the ratio of U.S. ADRs per home country share. This ratio can be anything less than or greater than 1. For example, a ratio of 4:1 means that one ADR share represents four shares in the foreign company. The majority of ADRs range in price from $10 to $100 per share. If the shares are worth considerably less in the home country, then each ADR will represent several real shares. Foreign entities generally like ADRs because it gives them U.S. exposure, which allows them to tap into the rich North American equity markets. In return, the foreign company must provide detailed financial information to the sponsor bank.
Objectives and Risks
The main objective of ADRs is to save individual investors money by reducing administration costs and avoiding duty on each transaction. For individuals, ADRs are an excellent way to buy shares in a foreign company and capitalize on growth potential outside North America. ADRs offer a good opportunity for capital appreciation as well as income if the company pays dividends. Analyzing foreign companies involves more than just looking at the fundamentals. There are some different risks to consider such as the following: Political Risk - Is the government in the home country of the ADR stable? Exchange Rate Risk - Is the currency of the home country stable? ADRs track the shares in the home country; therefore, if its currency is devalued, it trickles down to your ADR and can result in a loss.
Inflationary Risk - This is an extension of the exchange rate risk. Inflation is a big blow to business, and the currency of a country with high inflation becomes less and less valuable each day. How to Buy or Sell It ADRs are bought in exactly the same way as common stock. Whether you use a full service or discount brokerage doesn't matter. There is no minimum investment for most ADRs; however, as with any investment, many brokerages require clients to have at least $500 to open an account.
Strengths
• ADRs allow you to invest in companies outside North America with greater ease.
• By investing in different countries, you have the potential to capitalize on emerging economies.
Weaknesses
• ADRs come with more risks, involving political factors, exchange rates and so on.
• Language barriers and a lack of standards regarding financial disclosure can make it difficult to research foreign companies
Three Main Uses
• Capital Appreciation
• Income
• Diversification
2) Annuity
What Is It?
You can think of an annuity as another way of saying "annual payments". An annuity is a series of fixed-amount payments paid at regular intervals over the specified period of the annuity. Most annuities are purchased through an insurance company.
A "deferred" annuity means that the series of annual payments will not begin until a later date. This is popular with retirees because they can defer taxes until annual payments are received. An "immediate" annuity means that the income payments start right away. Some annuity contracts are good for life, so if you live long, then the insurance company must continue to pay you. The insurance companies are basically betting that you will die before the full value of the annuity is paid out.
There are two distinct types of annuities:
Fixed Annuity - This means the insurance company makes fixed dollar payments to the annuity holder for the term of the contract. This is usually until the annuitant dies. The insurance company guarantees both earnings and principal. This is a fairly good financial instrument for those looking to receive a fixed investment income.
Variable Annuity - This means that at the end of the accumulation phase the insurance company guarantees a minimum payment, and the remaining income payments can vary depending on the performance of your annuity investment portfolio. Annuities allow you to invest in a managed portfolio of stocks, bonds, money market funds, or any combination thereof. The performance of this portfolio determines the annual payment you will receive.
Objectives and Risks
Annuities are often forgotten by individual investors, partly because people are unaware of their benefits. Annuities are advantageous for those looking for a relatively low-risk investment with a decent rate of capital appreciation. Deferred annuities allow you to enjoy the benefits of compounding without worrying about the tax implications. The risks involved with annuities are fairly small compared to those of other investments because your investment is heavily regulated by the government. It is a good idea to ask the company from which you purchase an annuity if the company is insured - not all of them are. One precaution: annuities allow you to withdraw your principal, but you may be subject to stiff penalties. How to Buy or Sell It Annuities are offered by most insurance companies, banks and brokers. The minimum investment for an annuity is typically $1,000 plus purchase fees. These fees can range from a load to an annual management fee that can be a maximum of 1.5% of your total investment.
Strengths
• Deferred annuities allow all interest, dividends and capital gains to appreciate tax-free until you decide to annuitize (start receiving payments).
• The risk of losing your principal is very low - annuities are considered very safe.
Weaknesses
• Fixed annuities are susceptible to inflation risk because there is no adjustment for runaway inflation. Variable annuities that invest in stocks or bonds provide some inflation protection.
• If you die early, then you will not get back the full value of your investment.
Three Main Uses
• Capital Appreciation
• Tax-Deferred Benefits
• Safe Investment
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What Is It?
Introduced to the financial markets in 1927, an American Depository Receipt (ADR) is a stock that trades in the United States but represents a specified number of shares in a foreign corporation. ADRs are bought and sold on U.S. stock markets just like regular stocks and are issued/sponsored in the U.S. by a bank or brokerage. ADRs were introduced in response to the difficulty of buying shares from other countries which trade at different prices and currency values. U.S. banks simply purchase a large lot of shares from a foreign company, bundle the shares into groups and reissue them on either the NYSE, AMEX or Nasdaq. The depository bank sets the ratio of U.S. ADRs per home country share. This ratio can be anything less than or greater than 1. For example, a ratio of 4:1 means that one ADR share represents four shares in the foreign company. The majority of ADRs range in price from $10 to $100 per share. If the shares are worth considerably less in the home country, then each ADR will represent several real shares. Foreign entities generally like ADRs because it gives them U.S. exposure, which allows them to tap into the rich North American equity markets. In return, the foreign company must provide detailed financial information to the sponsor bank.
Objectives and Risks
The main objective of ADRs is to save individual investors money by reducing administration costs and avoiding duty on each transaction. For individuals, ADRs are an excellent way to buy shares in a foreign company and capitalize on growth potential outside North America. ADRs offer a good opportunity for capital appreciation as well as income if the company pays dividends. Analyzing foreign companies involves more than just looking at the fundamentals. There are some different risks to consider such as the following: Political Risk - Is the government in the home country of the ADR stable? Exchange Rate Risk - Is the currency of the home country stable? ADRs track the shares in the home country; therefore, if its currency is devalued, it trickles down to your ADR and can result in a loss.
Inflationary Risk - This is an extension of the exchange rate risk. Inflation is a big blow to business, and the currency of a country with high inflation becomes less and less valuable each day. How to Buy or Sell It ADRs are bought in exactly the same way as common stock. Whether you use a full service or discount brokerage doesn't matter. There is no minimum investment for most ADRs; however, as with any investment, many brokerages require clients to have at least $500 to open an account.
Strengths
• ADRs allow you to invest in companies outside North America with greater ease.
• By investing in different countries, you have the potential to capitalize on emerging economies.
Weaknesses
• ADRs come with more risks, involving political factors, exchange rates and so on.
• Language barriers and a lack of standards regarding financial disclosure can make it difficult to research foreign companies
Three Main Uses
• Capital Appreciation
• Income
• Diversification
2) Annuity
What Is It?
You can think of an annuity as another way of saying "annual payments". An annuity is a series of fixed-amount payments paid at regular intervals over the specified period of the annuity. Most annuities are purchased through an insurance company.
A "deferred" annuity means that the series of annual payments will not begin until a later date. This is popular with retirees because they can defer taxes until annual payments are received. An "immediate" annuity means that the income payments start right away. Some annuity contracts are good for life, so if you live long, then the insurance company must continue to pay you. The insurance companies are basically betting that you will die before the full value of the annuity is paid out.
There are two distinct types of annuities:
Fixed Annuity - This means the insurance company makes fixed dollar payments to the annuity holder for the term of the contract. This is usually until the annuitant dies. The insurance company guarantees both earnings and principal. This is a fairly good financial instrument for those looking to receive a fixed investment income.
Variable Annuity - This means that at the end of the accumulation phase the insurance company guarantees a minimum payment, and the remaining income payments can vary depending on the performance of your annuity investment portfolio. Annuities allow you to invest in a managed portfolio of stocks, bonds, money market funds, or any combination thereof. The performance of this portfolio determines the annual payment you will receive.
Objectives and Risks
Annuities are often forgotten by individual investors, partly because people are unaware of their benefits. Annuities are advantageous for those looking for a relatively low-risk investment with a decent rate of capital appreciation. Deferred annuities allow you to enjoy the benefits of compounding without worrying about the tax implications. The risks involved with annuities are fairly small compared to those of other investments because your investment is heavily regulated by the government. It is a good idea to ask the company from which you purchase an annuity if the company is insured - not all of them are. One precaution: annuities allow you to withdraw your principal, but you may be subject to stiff penalties. How to Buy or Sell It Annuities are offered by most insurance companies, banks and brokers. The minimum investment for an annuity is typically $1,000 plus purchase fees. These fees can range from a load to an annual management fee that can be a maximum of 1.5% of your total investment.
Strengths
• Deferred annuities allow all interest, dividends and capital gains to appreciate tax-free until you decide to annuitize (start receiving payments).
• The risk of losing your principal is very low - annuities are considered very safe.
Weaknesses
• Fixed annuities are susceptible to inflation risk because there is no adjustment for runaway inflation. Variable annuities that invest in stocks or bonds provide some inflation protection.
• If you die early, then you will not get back the full value of your investment.
Three Main Uses
• Capital Appreciation
• Tax-Deferred Benefits
• Safe Investment
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