Looking for a way to invest in specific foreign companies without learning all the intricacies of other country's stock markets? You may want to consider American depositary receipts (ADRs).
ADRs are the form in which foreign stocks trade on U.S. stock exchanges. 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, which is a ratio set by the depositary so the ADR's price falls within a range considered typical for U.S. stocks.
For an investor, ADRs can offer advantages over purchasing individual stocks on foreign stock exchanges:
- ADRs are traded on U.S. stock exchanges. Thus, you don't need to become familiar with foreign stock markets or deal with the delays that can occur in foreign markets.
- All stock transactions are executed in U.S. dollars, 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.
- Financial reporting tends to be more complete. 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.
Before investing in ADRs, consider the following:
- 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.
- 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 purpose.