U.S. retail investors who have gone sour on Apple Inc after the drubbing the stock has been taking may want to think twice before trying to buy its main smart phone rival, Samsung Electronics Co Ltd, at least in American markets.
Apple's market value dropped by about $50 billion late on Wednesday as disappointing results, due to weak holiday sales of its iPhone, sent its shares plummeting 10 percent. Samsung's success in taking market share with its cheaper smart phones is seen as a major reason for Apple's problems, making the South Korean company an obvious alternative for investors.
Yet Samsung, with a market capitalization of $236 billion, isn't listed as an American Depositary Receipt (ADR) on major U.S. markets, though other foreign companies such as Toyota Motor Corp and Sony Corp are. Instead, an unofficial version of Samsung trades on the over-the-counter market, commonly referred to as the Pink Sheets, under the ticker.
Opting for these unsponsored shares, which trade on what's formally called the Grey Market, means you get nearly all the traditional benefits of owning the South Korean-listed version of Samsung shares, including any dividend payments, though they might not give investors voting rights.
But investors should be wary. Low trading volume and high bid/ask spreads might make it hard for an investor to sell a position quickly if something goes wrong. And it's just as hard to jump in when the news is good.
An average of only 195 unsponsored Samsung shares have traded over the past five days, according to Thomson Reuters data, compared with an average of 271,053 locally listed Samsung shares on the South Korean market during the same period. The lack of liquidity could add costs such as higher brokerage fees and outdated price quotes when an investor wants to buy or sell.
"You get no information during the day on how much trading there is, so when you put in an order to your broker you might get something quite different than what you were expecting," said Allan Nichols, an international telecom equity analyst at Morningstar who covers the company.
Samsung, which didn't respond to requests for comment, is due to report its fourth-quarter results on Jan. 25. Its shares have gained 24.2 percent in the last six months.
The company isn't alone in its decision to stay away from official ADRs.
As of Sept. 30, there were 1,344 unsponsored ADRs trading in the United States, according to money management firm Cambiar Investors, compared with 909 unsponsored ADRs traded in 2009.
The rise in unsponsored ADRs came after a U.S. Securities and Exchange Commission rule change in 2008 that allowed depository banks such as BNY Mellon and JP Morgan Chase to launch ADRs based on market demand without the consent of a company, according to Cambiar.
Listing fees and SEC disclosure requirements have prompted major companies to bypass sponsored ADRS as well. Swiss food and beverage company Nestle SA, German automaker Daimler AG and British brewer SABMiller Plc are among global companies that trade on the Pink Sheets. Investors who purchase these shares in dollars still take on the same risk of currency fluctuations as owning foreign shares in the company's home market.
Even so, there are reasons why small investors might take the risk and buy Samsung over-the-counter shares rather than go to the home market of an overseas company. Some brokerages require a minimum purchase of $5,000 or more to place trades on a foreign market and an investor also has to wait until that foreign market opens.
Investors who want to take smaller positions could consider the over-the-counter shares, said John Wightkin, director of equity research applications at Charles Schwab.
The cost to buy companies listed on the Pink Sheets tends to vary, based on an investor's account size and trading frequency. And investors would not be able to trade those shares on the South Korean market.
Larger investors, meanwhile, might want to opt to buy foreign shares directly in the target company's home market because of the liquidity.
While brokerage houses such as Schwab are expanding services that allow retail investors to trade international stocks directly in local markets, South Korea is typically not among the offerings. Instead, customers must place orders through brokers, meet minimum order sizes and pay additional fees that can include exchange fees, foreign currency fees and local tax withholding. Customers typically cannot trade on margin and must trade during foreign market hours as well.
"If you have a big enough account that they care about you, then it's easier to go with a broker with access to foreign exchanges," said Nichols, the Morningstar analyst. Investors who opt for over-the-counter shares should use limit orders, rather than market orders, because of the bid/ask spreads, he said.
Another, albeit watered-down, option for investors is an exchange-traded fund such as the $3.4 billion iShares MSCI South Korea Index fund, which has 21.5 percent of its assets invested in Samsung, according to Morningstar. Its next largest position is in Hyundai Motor Co, with 5.3 percent of assets.
The fund, which charges 61 cents per $100 invested, has an average volume of 2 million shares traded and a bid/ask spread of 2.1 percent, according to Morningstar.