If you’re interested in buying individual stocks, particularly for foreign multinational corporations (MNCs), you might have noticed that their stock is often listed on multiple exchanges.
Why is that so? What’s the difference between the stocks listed on each exchange? Which is better?
Read on to find out!
PS: This post is inspired by a question that a reader asked on one of my other posts. If I see more interesting questions like these in the comments, I might answer them in a post as well so that more people will know about them!
What Is Dual-Listing?
Dual listing is when any security (ie stocks) is listed on 2 or more different exchanges.
For example, Unilever is listed on both the London Stock Exchange (LSE) and the New York Stock Exchange (NYSE):
- LON: ULVR
- NYSE: UL
This means that you can buy Unilever shares from either of these stock exchanges.
Why would a company want to list its stock on multiple exchanges?
There are several benefits to dual-listing, namely:
- higher access to capital
- longer trading duration
- higher liquidity
First, having their stock listed on more than 1 exchange means a higher exposure of the stock to potential investors.
The number of people who invest in the stock is higher, which grants the company access to more capital than if they were restricted to their domestic market only.
Next, dual listing often results in a longer stock trading duration as market trading hours vary between each stock exchange.
Finally, both of the above points result in a higher trading volume of the stock.
This improves the liquidity of the stock, which is generally beneficial as it can be converted to or from cash without a significant loss in value.
How Does Dual-Listing Work?
Usually, a company starts off by listing its stock on its local stock exchange.
In the case of Unilever, a British company, that is the LSE.
In order to list its stock on another country’s stock exchange, the company would have to meet all regulatory requirements of the desired country.
Many MNCs want to list their stock on a US stock exchange like the NYSE in order to tap into the large US market.
However, this is difficult for most companies as the requirements are extremely stringent.
Thus, a workaround that most companies opt for is to use American Depository Receipts (ADRs).
An ADR is a certificate issued by a US bank that represents a specified number of shares (usually 1) of a foreign stock.
Before the bank can issue ADRs, they must first purchase shares of the stock on the respective foreign stock exchange.
They will then hold the shares as inventory and offer ADRs to customers for trading in the US market.
ADRs can be traded as per any regular shares on the market.
Both the share price and dividends are denominated in USD.
Since an ADR is essentially a representation of the foreign stock itself, there is usually little to no price difference between the ADR and the actual stock.
Price movements of the stock will result in similar movements of the ADR.
Here is a comparison of the price movement of ULVR (stock) and UL (ADR):
As you can see, the trend for both tickers is similar.
The difference in magnitude of prices between ULVR and UL is attributed to the pricing unit of each ticker.
ULVR is priced in GBX (British Pence), which has a value of 1/100 of 1 GBP (British Pounds), while UL is priced in USD.
Simply put, ADRs are a proxy for shares of a foreign company’s stock that can be conveniently traded on the US stock market.
ADRs remove the need to use a broker that grants access to foreign stock exchanges and the need to convert currencies.
Differences Between Dual-Listed Stocks
While an ADR is meant to be a representation of the underlying stock, at the end of the day, it is still different from the actual stock itself.
1: Listing Currency
The most obvious difference is that ADRs are listed in USD and pay dividends in USD, while foreign stocks are listed in their local currency and pay dividends in the same currency.
It should be noted that the USD prices and dividends are converted from the local currency of the stock by the ADR provider – they are not explicitly priced in USD.
In other words, investing in the ADR version of a stock does not omit exchange rate risk.
2: Shareholder Rights
Another difference is that owning an ADR does not equal owning the underlying stock.
You will unlikely have shareholder rights like voting or direct access to Annual General Meetings (AGMs).
This is because the actual owner of the shares you invest in is not you, but rather the financial institution that issued the ADR that you invested in.
It is akin to buying a stock that is held in custody for you in a custodian account rather than in a trading account that you fully own.
Which Is Better – Stock Or ADR?
Whether it’s better to invest in the stock directly or via an ADR comes down to the country in which the stock is listed and how much you value shareholder rights.
If shareholder rights are important to you, then the clear answer is to invest in the stock directly through the foreign stock exchange as ADRs do not grant you shareholder rights.
If you’re indifferent, then the next factor we can use to determine which is better is cost.
The advantage of ADRs being traded on the US market is that the brokerage fees are typically the lowest and many brokers grant trading access to the US market.
For example, brokers like Webull and Syfe Trade offer zero-commission trading for US markets.
Most of the brokers available in Singapore support US markets:
However, ADRs often come with an additional ADR fee that is usually charged at USD 0.01 – 0.03/share to cover the administrative cost of issuing the ADRs.
Meanwhile, investing directly in the stock means that you need to trade on the stock exchange that it is listed in.
So, you will first have to find a broker that grants trading access to the relevant market.
In the case of Unilever (ULVR), it is the LSE, which fewer brokers in Singapore support:
- Interactive Brokers
- Standard Chartered Online
The cost of investing in the stock then depends on the brokerage fees for that market.
To determine which approach is cheaper and therefore “better”, you would have to compare the investing costs for both scenarios.
It should be noted that while brokerage (commission) fees are generally fixed, ADR fees that are charged on a per-share basis will expectedly increase as you continue to invest in them and buy more shares.
In general, I think investing in the stock directly via the foreign stock market will be cheaper than investing in ADRs in the long run.
Many MNCs have their stock listed on multiple exchanges, especially non-US MNCs.
Doing so increases the exposure of their stock and company while improving the liquidity of their stock.
A common method that MNCs use to list their stock on US markets is via ADRs, which streamlines the investing process, though this benefit is mostly experienced by US investors only.
While investing in ADRs is vastly similar to investing in the underlying stock directly, the cost of investing in ADRs is expected to continually increase whenever investors buy more shares of ADRs.
In the long run, it seems that investing directly in the stock is the better approach.