This article is the second of a two-part series that explains why and how American investors should buy British shares. You can read the first article here.

LONDON -- Last time around, I looked at how American investors can diversify their portfolios by buying shares in British companies. I also explained the reasons why British companies pay dividends that are typically 50% larger than those paid by American companies.

This time I'm going to review the ways in which you can buy shares in British companies. As I'm British, I have a different perspective on the matter, though I can assure you the buying process is much easier than you might think. That's because you can buy shares in many British companies through American brokers, just as if you were buying shares in American companies -- and you don't even need to convert your dollars into British pounds to do so!

Easy to buy in New York
In many cases, it is no more difficult to buy the shares of a British company than those of General Electric or Microsoft. You see, many large British companies are traded in New York in the form of American Depositary Receipts or American Depositary Shares.

An ADR represents several British shares, while an ADS represents one share. ADRs and ADS are priced in dollars, their prices track the relevant London share price, and they also pay dollar-denominated dividends. The IRS should treat these dividends as if they were paid by an American company with no withholding tax, but if the British company is a real-estate investment trust, there are different rules -- so check with an accountant!

A major point in favor of buying British shares via New York is that you avoid something called "stamp duty" -- a rather old-fashioned and costly British tax that's charged on all purchases of British-based shares in London. Indeed, many British investors with U.S. dollar accounts have been known to buy ADRs to avoid stamp duty.

By the way, one American investor who has bought British of late is Warren Buffett. The CEO of Berkshire Hathaway has spent more than $1 billion buying the shares of Tesco (OTC: TSCDY), Britain's largest supermarket chain and an FTSE 100 favorite among ordinary British investors. You can read all about Buffett's purchase in this free report: "The One UK Share That Warren Buffett Loves."

The Securities and Exchange Commission has on its website an informative document about foreign investing (link opens PDF file).

A worked example
The world's largest distiller is British company Diageo (NYSE: DEO). You can buy its shares in New York as ADRs, which represent four shares. At the time of writing, Diageo shares traded at 15.38 pounds each in London, while the ADRs were $99.78 in New York.

So at an exchange rate of $1.6072 per 1 pound, four Diageo shares are worth $98.87, which is about 0.9% lower than the ADR price. The difference is due to that British stamp duty and foreign-exchange costs, and it means an ADR will usually trade at a slight premium to the London-listed shares.

If we look at the dividends paid in 2011, a Diageo ADR received $2.595, while a Diageo share in London paid 40.4 pence. So if we convert the sterling dividend to a dollar dividend, we get $2.597. The small difference is due to different exchange rates applying on the dates when the dividend was converted by Diageo from British pounds into dollars.

Investing via funds
If you prefer to invest in funds, many American investment management firms offer funds that specialize in Britain.

But note, if you use index-tracker funds, you need to be aware that the London Stock Exchange's FTSE 100 (INDEX: ^FTSE) index doesn't accurately represent the British economy -- in particular, almost 30% of the benchmark index consists of international oil and mining companies. One of the largest companies in the FTSE 100 is BHP Billiton, the world's largest miner, with substantial operations in Australia but only two small divisions in Britain.

Foreign exchange risks
Many investors don't invest overseas because of the risk that the dollar will strengthen against foreign currencies, which would reduce the value of their investments. However, it is increasingly difficult to avoid foreign-exchange risk nowadays, because many companies both import and export goods and have moved some of their manufacturing capacity to other countries.

A good example is Apple (Nasdaq: AAPL), whose latest annual report showed that about 35% of its sales were made in America. So with the remaining 65% using currencies other than the dollar, and with the vast majority of its products being made in Asia, Apple's business is heavily exposed to foreign-exchange movements.

The more international sales a company has, the greater its shareholders' exposure to foreign-exchange risk. But remember that foreign-exchange risk works two ways; if the U.S. dollar falls against foreign currencies, then the value of your overseas investments increases.

Getting information
Most British companies have good investor-relations websites, which usually have several years' worth of annual and half-yearly reports available for you to download as PDF files, as well as official news announcements and corporate presentations.

One thing to bear in mind is that quoted British companies are required by law to produce financial reports every six months, rather than every three months, though many also produce quarterly accounts or interim management and sales reports. To keep up to date with earnings statements from British companies, sites such as Investegate can email you news from your favorite shares as soon as it is published by the London Stock Exchange.

Some other good sources of information on British companies and wider economic and business news are The Motley Fool UK, newspaper websites such as The Daily Telegraph, The Guardian, The Independent, and The Scotsman -- though The Financial Times nowadays limits your access unless you're a paying customer, while The Times sits entirely behind a paywall.

I'd also recommend BBC and The Economist. You can find a lot more information about ADRs at ADR.com, which is run by JPMorgan Chase.

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