American Depositary Receipt - Foreign Investing
Investing in foreign stocks or in a foreign stock market can be a complex and challenging undertaking. However, an American Depositary Receipt (ADR) makes the process much easier for an individual investor. First, let me explain what an ADR is, then I will explain how it works. An American Depositary Receipt is a foreign stock issued on an U.S. exchange by an investment bank denominated in U.S. currency. To make this happen, an investment bank will purchase a specific number of shares of the foreign stock listed on a foreign exchange. After purchasing the foreign stock, the bank will register the security to be issued with the SEC (Securities Exchange Commission) and then issue an ADR. One ADR usually represents one share of foreign stock.
The main advantage of buying an American Depositary Receipt rather than the foreign stock itself is the ease of the transaction. Many people are more familiar and comfortable investing on the U.S. exchanges. ADRs are a great way to invest abroad without having to convert U.S. dollars to many different currencies. Also, it can be difficult to learn how to purchase shares on a foreign stock exchange as an individual investor. Another advantage offered by an ADR is that if the foreign stock does pay dividends, the investment bank will convert the dividends to U.S. dollars and remit the payment to you. In addition, if the dividend is subject to foreign tax, the investment bank will withhold the tax so you don't have to worry about it.
In conclusion, American Depositary Receipts are a great way to invest in foreign companies. Since the ADRs are issued on U.S. exchanges they are very easy to buy and sell without having to convert currencies. However, keep in mind that even though you are investing on a U.S. exchange, the foreign companies profits are usually earned in a different currency. Therefore, if exchange rates were to move against you, it would hurt the value of your ADR. If you are considering investing in foreign stocks, ADRs should be part of your investment decision; however, you should become familiar with all the risks associated with foreign investing before making an investment decision.