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How to Invest in Foreign IPOs

Emerging markets are full of breakout companies


In the U.S., we tend to focus on the U.S. — and that means we often fail to see great investment opportunities in other countries. This can be a big mistake, as emerging markets continue to grow … and should growing for some time longer. Already, foreign lands are a source of great companies, including Alibaba, Baidu (NASDAQ:BIDU), Skype and Spotify.

With that in mind, foreign IPOs can be the perfect way to find — and capitalize on — the next big thing. Don’t be intimated, either; all it takes is some effort and homework.

Shorting IPOs: An Especially Risky Bet
Shorting IPOs: An Especially Risky Bet

Perhaps one of the easier ways to buy foreign IPOs is to purchase the offerings of ADRs (American Depositary Receipts). These represent equity interests in non-U.S. companies that list on U.S. markets. Plus, there is really no difference in buying a U.S.-based company vs. an ADR; it’s a seamless experience.

Of course, another approach to buying foreign IPOs is to invest directly in another country’s stock exchange. Top online brokerage firms like Charles Schwab (NYSE:SCHW) and E*Trade (NASDAQ:ETFC) have strong foreign investment operations and also make the process pretty easy for retail investors. Still, U.S. brokerages still have some limitations. They will probably not have access to upcoming IPOs, nor have much background research.

Instead, you will most likely need to open a brokerage account in whatever country the company you have your eye on is from. A good start to simply do some quick online research and find some of the top operators. Setting up an account will likely just involve filling out several forms online and then, of course, wiring money to the account.

When you talk to the brokerage firm, see what offerings they have participated in and the typical allocation a retail investor received. Keep in mind that many foreign countries have wide access to hot IPOs for retail investors — which is generally not the case in the US. Also, with a foreign broker, ask to see if the firm provides ongoing research on new offerings.

Of course, this type of investing is very risky. Many countries do not have the same kinds of extensive regulations that exist in the U.S. A prime example is China, which has seen many shaky and even fraudulent IPOs over the years. I’d recommend being cautious and not investing a huge amount of money in any picks.

Still, this laissez-faire approach is fading fast in today’s global market. In fact, the China Securities Regulatory Commission is already taking major steps to clean things up with new offerings. This is likely something that other countries will do as well.

All in all, investing in foreign IPOs is definitely something any individual investor can do and provides a nice opportunity to find breakout companies. Don’t be afraid to take a little risk and venture out of your comfort zone and across the border.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.”Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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