Recent Trends

Four important trends have changed the contemporary investment environment: (1) globalization, (2) securitization, (3) financial engineering, and (4) information and computer networks.

Globalization

If a wider range of investment choices can benefit investors, why should we limit ourselves to purely domestic assets? Increasingly efficient communication technology and the dismantling of regulatory constraints have encouraged globalization in recent years.

U.S. investors commonly can participate in foreign investment opportunities in several ways: (1) purchase foreign securities using American Depository Receipts (ADRs), which are domestically traded securities that represent claims to shares of foreign stocks; (2) purchase foreign securities that are offered in dollars; (3) buy mutual funds that invest internationally; and (4) buy derivative securities with payoffs that depend on prices in foreign security markets.

Brokers who act as intermediaries for American Depository Receipts purchase an inventory of stock from some foreign issuer. The broker then issues an American Depository Receipt that represents a claim to some number of those foreign shares held in inventory. The ADR is denominated in dollars and can be traded on U.S. stock exchanges but is in essence no more than a claim on a foreign stock. Thus, from the investor's point of view, there is no more difference between buying a British versus a U.S. stock than there is in holding a Massachusetts-based company compared with a California-based one. Of course, the investment implication may differ: ADRs still expose investors to exchange-rate risk.

World Equity Benchmark Shares (WEBS) are a variation on ADRs. WEBS use the same depository structure to allow investors to trade portfolios of foreign stocks in a selected country. Each WEBS security tracks the performance of an index of share returns for a particular country. WEBS can be traded by investors just like any other security (they trade on the Amer globalization

Tendency toward a worldwide investment environment, and the integration of national capital markets.

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