People nowadays are increasingly seeking investment opportunities beyond their local markets. A Global Depositary Receipt is one of the solutions that enable investors to diversify their portfolios internationally. Read ahead for the GDR definition and a detailed explanation of how it works!
What Is A GDR?
A Global Depositary Receipt (GDR) is a financial instrument that represents shares of an international company traded on two or more global stock exchanges. This means that although shares of a multinational company are traded domestically in the country of origin, global investors based outside that jurisdiction can still invest in it using GDRs.
What You Need To Know About GDRs
Let’s take a look at an example of a GDR. Suppose a US-based company wishes to list its stock on the London and Hong Kong Stock Exchanges. To achieve it while being compliant with regulations in all countries in question, it can sign depositary receipt agreements with relevant banks, which will then issue shares on their respective stock exchanges.
Note that a GDR issued by a depositary bank represents a certain number of underlying shares, ranging from a fraction to multiple units. The share composition is determined by the company’s attractiveness to local investors.
The GDR purchase process typically involves several stages and is conducted via a broker in the investor’s country, a broker in the market of the international company, a depositary bank representing the buyer, and a custodian bank.
Overall, the GDR concept promotes convenience, as it enables people to invest in foreign companies without having to go through the cumbersome process of purchasing shares on a foreign exchange. Besides, GDRs and their dividends are priced in the local currency of the exchanges where they are traded.
What’s more, GDRs are also a great means for companies to raise capital from investors without being limited to a single country.
