American depositary receipts (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. This ratio is 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 delays that can occur in foreign markets.
- All stock transactions are executed in U.S. dollars, including purchases, sales, and dividends. Prices are quoted in U.S. dollars and include both changes in the stock price and currency fluctuations.
- Financial reporting tends to be more complete. If the ADR is sponsored, reports will be prepared in English. However, financial reports are based on 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 stocks, international stocks have unique risks, such as currency fluctuations, political and social changes, and greater share price volatility.
Please call if you'd like to discuss ADRs in more detail or would like help researching specific ADRs.