Investing in the primary market of listing should be prioritized. It is a common assumption that companies originates from the country where they are listed in. The answer is no. Most of time, companies will list on the stock exchange of their countries, such as Singapore Airlines on Singapore Stock Exchange. However, companies can choose to list on a foreign market. An example would be listing as ADR in the US markets.
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An example would be Alibaba Group Holding Limited, a Chinese company listed in United States. Companies can also choose to list on multiple markets. An example would be Nestle S.A., a Swiss company listed on Switzerland, India, Malaysia, London and United States.
To be listed on multiple exchange is more of an exception than the norm, however, it is not uncommon to see companies listed on 2 exchange, which brings us back to the topic of investing in the primary market.
Investing in the primary market should always be on the minds of investors as it usually provides much more liquidity, lesser forex exchange risk, lesser tax implications and lesser legal implications.
Let’s use Tencent Holdings Limited as an example, a Chinese company listed on Hong Kong Stocks Exchange under the ticker “700”. Tencent Holdings Limited is also listed in the United States on the OTC market under the ticker “TCEHY” and “TCTZF”.
The average daily transaction volume stands at 19.5M, 4M and 36k respectively.
Investing in the primary market provides investors with more volume which allow their orders to be filled more easily. Buying an illiquid stock can mean that you have to increase your bid price before your order gets filled. Selling an illiquid stock can mean that you have to reduce your ask price before your order gets filled.
Tencent Holding Limited is listed on the Hong Kong Stock Exchange in Hong Kong dollars. It is listed in United States in US dollars.
The two pictures shows the share price of Tencent on 17th August 2018 in HK dollars and US dollars. At first sight, it seems that it is a lot cheaper to buy the shares in US dollars. However, this is a step that many beginner investors neglects, which is currency conversion. Once they determine their entry price, they buy straight into it without converting the currency.
A simple currency conversion using HK$337 will generate US$42.92, which shows that it is indeed cheaper to buy the shares in US dollars.
This also shows another issue about having stocks listed in multiple markets, all the markets will not be in 100% efficiency all the time. There will be currency discrepancy.
Whenever dividends are issued, the dividends has to be converted to US dollars before they can be issued to investors. In the event that investors are non-US citizens, they will be liable for dividend tax.
For example, you are a Singaporean buying Tencent Holdings Limited in US. As the traded currency is in US dollars, you would have to convert your monies to US dollars. This is still fine, it is no longer that fine when you are receiving dividends. As Tencent Holdings Limited reports their earnings in Chinese Yuan, they would have to convert their Chinese Yuan to HK dollars as their stock is traded in HK dollars.
If you buy your Tencent’s shares in US, the dividends will be further converted from HK dollars to US dollars. Since you are a Singaporean, the US dollars dividends will be converted to Singapore dollars when you withdraw your dividends.
This results in a three currency conversion which will incur cost and reduce the amount of dividend you receive.
30% dividend tax are applicable for Singaporean, therefore, this will further reduce the dividend that you will receive. Buying straight from Hong Kong prevents such issues.
Foreign companies that are listed in US do not list their shares. ADRs that represent their shares are listed. What is an ADR? ADR stands for American Depository Receipt. The term ADS, American Depository Security, is often used interchangeably with ADR bu they are pretty much about the same.
Investors cannot buy shares of Alibaba and Tencent on the US market, they can only buy the ADR that represents the shares of these companies. Well, all these sounds like a technicality, however, the issue is, 1 ADR may not represent 1 share.
Behind every ADR is a ADR Ratio, which determines the number of shares they represent, some companies makes things easy by having a 1:1 ratio, such as Alibaba and Tencent.
Our own Singapore Airlines has a 2:1 ratio for their ADR, which allows investors to purchase their shares in the US market, however, every ADR represents half a share.
Investing in the primary market of investment is always preferred unless there is a very good reason not to. Doing so allows you access to increased liquidity, prevents currency conversion issues, dividend conversion cost, taxes as well as ADR Ratio conversion hassle. Not all the stocks that are listed in secondary markets will have the above-mentioned issues, nonetheless, they can be pointers that you would like to take note of when investing in a company through the secondary market.
Of course, before any investment, one must know what they are investing in. Without the investment story, investors should not even bother about all the above mentioned pointers. They should be staying out of the market.
Investment in Singapore for Beginners
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