American depositary receipts (ADRs) are the form in which foreign stocks trade on U.S. stock exchanges. ADRs are traded on U.S. stock exchanges. All stock transactions are executed in U.S. dollars, Financial reporting tends to be more complete. Before investing in ADRs, consider the following:
An ADR is a negotiable certificate issued by a U.S. bank (the depositary), representing shares of a foreign stock. The original foreign stock certificates are owned by the bank and held in the issuer's country. Each ADR can represent a multiple or fraction of the original foreign stock. This ratio is set by the depositary so the ADR's price falls within a range considered typical for American stocks.
ADRs can be sponsored or unsponsored. Sponsored ADRs are handled by a single bank in the U.S. through a formal contractual agreement between the company and the bank.
Sponsored ADRs must comply with all disclosure and reporting requirements of the Securities and Exchange Commission (SEC), are listed on major U.S. stock exchanges, prepare English translations of financial information, and grant shareholders voting rights.
Unsponsored ADRs are created by a bank or broker who identifies a demand for a specific foreign stock, purchases shares, and places those shares in a depositary. The issuer of the foreign stock is not involved in the transaction.
Although registered with the SEC, unsponsored ADRs do not have to comply with all of the SEC's financial reporting requirements, shares are not eligible for U.S. exchange listing, and shareholders are not granted voting rights.
For an investor, ADRs can offer advantages over purchasing individual stocks on foreign stock exchanges:
You don't need to become familiar with foreign stock markets or deal with the delays that can occur in foreign markets.
including purchases, sales, and dividend receipts. Prices are quoted in U.S. dollars and include both changes in the local stock price and currency fluctuations.
If the ADR is sponsored, reports will be prepared in English. However, the financial reports are prepared using the accounting rules in effect in the company's home country, which can differ substantially from U.S. accounting principles. Keep in mind that you are still investing in a foreign equity. In addition to the risks associated with domestic investing, international investing has unique risks, such as currency fluctuations, political and social changes, and greater share price volatility.
Research the ADR carefully before investing. You are investing in a company in a foreign country, so you should become familiar with the economics of that country.
You may want to concentrate on sponsored ADRs because of their more extensive financial reporting requirements.
Only consider ADRs if you are investing for the long term. If you are trying to take advantage of short-term exchange rate movements, there are other investment vehicles more suited for that purposes.
