In most developed countries, by their calculations, that impact seldom exceeds half a percentage point a year. But in India, whose paper-based trading and settlement systems produce countless mistakes and delays, the costs approach two percentage points. The lag is typically three days in the U.S. and most other developed markets, but as much as five days in some. Without such limits, sellers of stock don't know for sure when they'll be paid, and buyers don't know when they'll get their shares. This leaves investors much more vulnerable to mishandling of their trades during the settlement process.
Individual investors can minimize such concerns by investing in American depositary receipts.
ADRs are certificates representing shares in a foreign company held in custody overseas, but their trades are settled in the U.S., so the lag time is capped at three days. The number of ADR programs almost doubled to 1,301 in 1996 from 700 in 1986, according to Bank of New York, one of the biggest issuers of depositary receipts, and about a quarter are listed on exchanges. However, ADRs have their shortcomings. Of Japan's more than 2,000 listed companies, for instance, just 150 are available as ADRs, and of those, only 27 are listed on the New York Stock Exchange or Nasdaq Stock Market. Moreover, ADR securities tend to be priced at a premium relative to their fundamentals and to their peers on the local market, says Paul Ehrlichman, an international fund manager at Brandywine Asset Management.