With the US stock market lunging upward with increasing volatility, international stocks have regained some appeal.
By diversifying abroad, you can hedge against declines in the US market. One route is through mutual funds.
But there's another way you can go global. It takes more research and attention, but it's more direct.
You can buy shares in overseas firms. Many highly regarded foreign firms list their stock on US stock exchanges, which means they've passed stringent requirements for accounting and disclosure methods.
That takes some - but not all - of the risk out of your investment and lets you follow their share prices on the Internet or in daily newspaper stock tables.
These shares in overseas firms, sold in the United States, are called American Depositary Receipts, or ADRs.
"ADRs can be very attractive," says Arda Nazerian, a vice president of the American Stock Exchange. Many are priced lower, relative to the companies' earnings, than comparable US stocks.
Each ADR represents a share or a specified number of shares in the overseas firm and is issued by a US bank. The three main US banks in the ADR market are Bank of New York, J.P. Morgan, and Citibank.
One disadvantage of ADRs compared with foreign mutual funds: You have to do the research yourself.
International funds often send analysts trotting all over the globe, digging up overlooked and undervalued companies.
With ADRs, you get none of that expertise.
But maybe you don't want or need it. Let's say you just saw "Lost World: Jurassic Park" and got a sneak peek at the new Mercedes sport-utility vehicle featured in it, and you think it looks like a monster hit for Mercedes.
If you want to cash in on that hunch, a mutual fund won't take you there, but an ADR in Mercedes parent Daimler Benz has the horsepower to do it. (It's not a bad hunch. Daimler's ADRs are up 80 percent since January, 1995 and almost 20 percent for this year. But there is a lot more to Mercedes's success than a movie and a lot more to Daimler's success than Mercedes.)
Over 1,000 ADRs show up on US exchanges. The New York Stock Exchange (NYSE) considers more ADR listings "a priority," says a spokesman, because of a dwindling number of shares in US companies as they merge or take their shares off the exchanges.
The NYSE lists 300 ADRs, including Daimler-Benz (Germany), Royal Bank of Canada, Sony, Honda, British Airways, and Philips Electronics (Netherlands).
The American Stock Exchange and the Nasdaq system also list ADRs. One recent addition to the American Stock Exchange is Ramco Energy, an energy-development firm working in Europe's Caucasus Mountains. It might be worth checking out, since some analysts see hidden value in energy service firms.
The stock currently trades slightly under $18, with a low for the year at $15.75.
Another ADR on the American Exchange is Tubos de Acero de Mexico, a large steel producer. Tubos has been somewhat volatile. It's now priced around $17, with a high of $18 and a low of $9 during the past year.
In addition, scores of overseas firms trade on the over-the-counter market and the so-called "pink sheets," which list non-exchange companies.
Pink sheet listings fall into the high risk category, although they can be solid performers.
For example, one holding of the Lexington Troika Dialog Russia Fund, the top-performing equity mutual fund in the US (up 80 percent this year) has been Gazprom, a Russian natural-gas company. Gazprom is traded in the US through the over-the-counter market.
For a ticket to these foreign stocks, you have to call a broker. A discount broker offers the most economical route, but you'll be on your own for the research.
The broker will place your order to the country where the firm is located. In that country, your shares will be tendered to the offices of a bank, which holds the stock.
What you get will be a certificate of ownership, either in your name, or as a street account, in the name of your brokerage firm.
When buying an American Depositary Receipt, experts advise special care:
* Investors should usually buy a sponsored ADR. That means the overseas company has an arrangement with a US bank that acts as depositary for the shares. It also means the company is courting US investors. Sponsored companies listed in the US meet strict accounting and disclosure laws. US shareholders have full voting rights in the company.
* Be wary of unsponsored ADRs. In this case, a bank or broker has put together a package of shares in a company, perhaps independently of the company itself. Unsponsored ADRs are not listed on US exchanges, and investors forgo voting rights. Shareholder information often is not up-to-date.
* ADRs can be volatile. Share prices will reflect both the success of the company and currency-rate changes.
* Do your homework. The best firms in some markets (such as Asia, excluding Japan) may not be ADRs. Study the company's earnings and prospects. For a free list of ADRs, call the Bank of New York: 212-815-2175. It will tell you if an ADR is sponsored or unsponsored.