BDRs: What is this type of investment and how does it work?

BDRs are a new investment option for individual investors since October 2020! Learn all about these securities of foreign companies traded on the Stock Exchange in Brazil!

Initially, BDRs have exploded in popularity since last year, and have attracted many individual investors interested in shares in the foreign market.

However, the application is nothing new, but before 2020 it was an investment limited only to large national investors, and difficult to access for individual investors.

However, last year the Securities and Exchange Commission (CVM) released these assets for non-qualified investors to trade.

In other words, anyone with less than R$1 million can buy and sell BDRs on the Stock Exchange. What was once the privilege of financial institutions, investment funds and 'Big Players' is now accessible to small investors. Investing abroad has never been easier than it is now!

In addition to being a new and excellent way to invest in companies abroad, something that many people in Brazil find very difficult, you no longer need to break the bank to be able to do this.

Companies like Apple, MacDonald's and Netflix are just a few examples of companies that we can invest in with BDRs. Those seeking greater diversification now have the possibility of expanding their range of investments with shares in companies abroad.

Let's talk about BDRs here, see exactly:

• What are BDRs;
• What are the types of BDRs in the financial market;
• What are the advantages;
• What are the risks;
• How to invest;
• 5 BDR options to invest in 2021.

What are BDRs?

Initially, the acronym BDR is the abbreviation for “Brazilian Depositary Receipts”, a term in English that literally means “Brazilian Depositary Receipts”. Basically, are certificates issued in Brazil that represent shares in companies abroad, or part of a share.

In other words, you can invest in Brazil in a company listed on the stock exchange of another country, such as NASDAQ, for example. They function as securities backed by shares of foreign companies (and since last year, Brazilian companies as well).

However, when we invest in BDRs we are not buying the shares directly. In reality, we are negotiating a receipt for a share purchased abroad by a custodian.

Hence the name “Deposit Receipts”, and these are the ones traded on the Brazilian Stock Exchange, the BDRs. Therefore, whoever buys them is not actually buying shares directly from these companies abroad, but investing in representative titles of these roles.

What are the types of BDRs in the financial market?

In advance, BDRs are divided into two main groups: sponsored and the non-sponsored. The big difference between them is the way in which they are traded on the Stock Exchange.

Sponsored BDRs

First of all, Sponsored BDRs are those in which the company issuing the shares itself hires a depository institution in Brazil. These are generally companies that have interests in the national market and want to actively participate in the Stock Exchange here.

 Sponsored BDRs are divided into three different levels:

Level 1

At this level companies do not need to register with the CVM for the securities to be traded.

However, securities can only be traded with authorization, in segments created specifically for this type of paper on the Stock Exchange, or in unorganized over-the-counter markets.

If they are sold in a public offering, however, they must be “restricted efforts,” which in practice limits the number of investors to 50. Although this level of BDRs has less bureaucracy, it is more restricted in its scope.

Levels 2 and 3

Levels 2 and 3 can be explained together, as they are very similar in practically every way. Both require the issuing company to be registered with the CVM in order to operate in Brazil.

Furthermore, all these companies must follow the same rules stipulated for Brazilian category A companies, as stipulated by the CVM itself.

For these BDRs, trading can be done directly on the stock exchange, and the difference is that in level 2 BDRs, the public offering is of “restricted efforts”. While level 3 BDRs can have their public offering widely distributed, if they are registered with the CVM.

Unsponsored BDRs

Now that we know what sponsored BDRs are, it is very easy to understand non-sponsored ones. These are securities where the initiative to offer BDRs does not come from the company that originally issued the shares, but from the depository institutions.

The entire process for obtaining a certificate in this category on the national market is carried out by these depository institutions. Since these institutions are responsible for the entire process of bringing the certificates to our market, it is also their responsibility to keep investors informed with reports, balance sheets and whatever else is necessary.

What are the advantages?

Access to the International Market

In an increasingly dynamic and interconnected market, with individual investors increasingly seeking more options, the domestic market alone is not enough. But since investing abroad is generally associated with a very high cost, BDRs offer a very advantageous option for the individual investor.

The main advantage of BDRs is precisely this access to the international market, facilitating the trading of securities of foreign companies. All this without having to worry about opening accounts abroad. Or worrying about taxes and fees normally associated with trading outside the country.

Settlement in reais

Another very advantageous point of BDRs is that all settlement of assets is done in reais, and operations are carried out in Brazil.

This makes it even more advantageous for those who want to diversify their investment portfolio, as they do not need to worry about the procedures and difficulties of investing in another jurisdiction.

What are the risks of investing in BDRs?

Despite all these advantages and the possibility of investing in companies abroad, we must always consider the downside: BDRs present a greater risk to the investor, as they are variable income investments. Many more moderate investors may not like this risk associated with variable income investments.

Constant price fluctuation

The constant price fluctuation is made even worse because the variation occurs in US dollars, which is another factor that affects the final price of the BDR. And it is worth remembering that even giant companies like Apple, Microsoft and Tesla are exposed to the same flaws and risks as any other company.

Company information

The second risk is related to the availability of information about companies abroad, as it is in another language.

Even though companies are required to publish their financial, accounting and corporate information in Brazil to operate here, The most relevant information will not always be among them. And the most detailed reports available will certainly be in another language, reflecting the company's origins.

The important thing is to always be aware of market information to mitigate the risks of investing in variable income..

The problem arises when the information is in English, German or French. Although it is very easy to obtain a translation from any language into any other language these days, a lot of information can be lost in the process.

How to invest?

Investing in BDRs is extremely simple and is nothing new. The process is identical to buying shares on the Stock Exchange, since BDRs are traded there.

Like this, you just need to know what the action code is of the company in which you intend to invest, and send the order via a BDR. Unlike shares, you can purchase a single BDR, instead of having to invest in lots of at least 100 shares.

Check out the step-by-step guide to investing in BDRs:

1. Open an account with a securities brokerage firm;
2. Deposit the money you want to invest into this account;
3. Choose which BDRs you would like to invest your money in;
4. Make the purchase using a Home Broker tool. Done!

The process itself is very simple, but always remember to research which BDRs you will choose to invest in, and the companies issuing these assets. This way, you can mitigate risks.

5 BDR options to invest in 2021

If you are already thinking about investing in BDRs, we will leave it here 5 options they had good performance in 2021, and which since last year have been an investment option in Brazil.

And always remember to do a lot of research and try to find out the smallest details about the market for each of these companies below..

MasterCard (MSCD34)

Mastercard is an essential company for billions of cardholders, retailers and banks, acting as the intermediary between you and your money.

And with the rise of the Internet of Things, it’s becoming increasingly rare to see people using paper money or holding cash in physical form. But what has really made MasterCard more competitive is the fact that newer companies in the payments industry (such as Google Pay and PayPal) use MasterCard’s network.

The tendency is for the company to grow as things change to a digital context, and so will the value of its shares.

TSMC (TSMC34)

Taiwan Semiconductor Manufacturing Company, the world's largest semiconductor chip manufacturing company, is the most sophisticated and has the most advanced technology.

The need for semiconductor chips grows exponentially every year, and last year we saw a surge in prices in this sector.

TSMC's biggest advantage is that the trend for the future is the internet. Thus, the need to digitize everything in our lives will create a lot of demand for the company's products.

The company's business model is to manufacture chips designed by its B2B customers, such as Apple, AMD, and Nvidia. As long as there is demand for smartphones and video games, there will be demand for chips, and TSMC will continue to grow.

Micron (MUTC34)

The technology sector is booming, which is why Micron is on this list. This is a company that produces RAM memory chips, like the ones we use in our computers.

Micron manufactures DRAM memory chips that are also used in cell phones, and this type of chip is essential for the operation of many modern devices, including those that use virtual intelligence, the so-called “smart devices”.

Disney (DISB34)

Moving away from the technology sector and into the entertainment sector, we have the American giant Disney.

In fact, the company needs no introduction, and its monetization system is very diverse. From amusement parks, toys and your new Disney Plus streaming service No one can offer as much in this sector as Disney.

The demand for quality entertainment has grown a lot, and even now that we spend more time at home, this company is a very safe bet.

Coca-Cola (COCA34)

Finally, still speaking of American giants, we have the option of acquiring BDRs of the century-old Coca-Cola. The company has always presented good numbers, and even during the pandemic it managed to deliver values above expectations.

With the diversification of products in the sector, and with the recovery of the economy, we predict that the company will have even greater growth than expected in the future and soon.

Conclusion

Since the CVM rules changed, investing in BDRs is an additional option for those who want to diversify their portfolio. For those who like stock market, then, BDRs are the tool you’ve been waiting for.

Being able to invest in companies abroad is not always easy, even with this new option, so we recommend caution when dealing with actions and securities of companies outside Brazil.

Finally, we know that the companies are foreign, but the BDRs are traded in Brazil. They came to bring more opportunities to those who are looking for alternative stock options outside the country, but do not want to give up security.

Did you like this content? Leave your comment and share it on your social networks. Take advantage and also read our article on Debentures! Click the button below and learn all about this type of financial investment.