Bank of Ireland was one of the first companies that I wanted to own that was not an American company. When I started out, I had no idea how to trade foreign stocks. Anyone who has been to New York City has probably seen Wall Street and knows that Wall Street is a hub of stock trading. In fact, the hub itself is the New York Stock Exchange (NYSE), which is a building that is located on Wall Street. Before the days of online trading, these stock exchanges were the places all of the action occurred. In addition to the NYSE, there are other American stock exchanges, such as the Nasdaq and the American Stock Exchange, as well as exchanges in Toronto, London, Tokyo, Shanghai, and other cities around the world.
As I began researching the different exchanges, I learned that each exchange has its own set of stocks that it trades and its own set of rules for its companies. I was curious about whether an American could trade a stock listed on a foreign exchange. Some online brokers allow such trading, but the good news for everyone is that many companies, such as the Bank of Ireland, have something called an American Depository Receipt (ADR). While a small online trader such as me might not have easy access to worldwide markets, large investment banks and brokerages do. Sometimes, these brokerages will buy large quantities of stock in a foreign company and then create an instrument (ADR) that trades on an American exchange and directly represents a certain number of shares of the foreign company. These ADRs trade on an American exchange just like an American stock does. In the Bank of Ireland’s case, the ADR symbol is IRE. One share of IRE, which trades on the NYSE, represents 40 shares of Bank of Ireland’s stock that trades on the Dublin and London exchanges. This information can be found on the Bank of Ireland’s website.
When an American buys one share of IRE, we are essentially getting 40 shares worth of BKIR, the symbol for Bank of Ireland shares on the London exchange. Why is this knowledge important? Sometimes it can provide a clue about how an ADR is priced in America. By going to the London exchange’s website, I can easily get a quote for BKIR: £0.34. So now it’s time for some more fun with numbers. If Suze has one share of IRE ADR that represents 40 shares of BKIR, and BKIR is trading at £0.34 on the London exchange, how much should Suze’s single share of IRE be worth in dollars? Since my mom is a high school teacher, I will first urge you all to seek out your high school algebra teachers and begrudgingly admit that problems such as this one actually do show up from time to time in the real world! A quick check with my buddy Google tells me that £0.34 is exactly $0.47, and $0.47 times 40 gives $18.80 expected price for one share of IRE. The actual closing price for IRE last week was $18.41, so this valuation is fairly close to being exactly right.
In certain instances, however, these correlations may be temporarily off. For example, during a large short squeeze, an ADR may trade at a much higher price than would be expected based on the price of its underlying shares. In this case, it might be a good idea to sell the ADR and anticipate that you will be able to buy it back at a lower price once the correlation returns. Identifying and taking advantage of short squeezes are skills that have made me a lot of money over the years. To learn more about how a short squeeze works, check with my buddy Google. To learn my tricks to trading short squeezes, save your money and wait for my book!
