Topic: Growth Stocks

American Depositary Receipts make it easy to invest in foreign stocks

American Depositary Reciepts stock image

An American Depositary Receipt, or ADR, is a certificate that represents a foreign stock that trades in the United States. Banks and brokerage firms in the U.S. issue or sponsor ADRs, and investors buy and sell them on U.S. stock markets, just like regular stocks.

If you own an American Depositary Receipt, you have the right to obtain the foreign stock it represents. However, investors usually find it more convenient to continue holding ADRs as part of their strategy for portfolio diversification.

Each American Depositary Receipt may represent one or more shares of the foreign stock. However, if the stock is expensive, the ADR may represent a fraction of a share. That way, the ADR will start trading at a moderate price, or be in range of similar stocks on the exchange where it trades. The price of an ADR usually stays close to the price of the foreign stock in its home market.


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ADRs make foreign investing much easier and safer for individual investors. The foreign company must provide detailed financial information to U.S. regulators, and to the sponsor, or “depositary,” bank or broker. Since ADRs trade on U.S. stock market, you don’t have to worry about exchange rates, foreign stock-exchange rules, or the language barrier. Price information is readily available, and transaction costs are lower. Trades will clear and settle in U.S. dollars. As well, the depositary bank or broker will convert any dividends or other cash payments into U.S. dollars before it sends them on to you.

Depositary banks that issue ADRs sometimes charge fees for their services; also they incur expenses for services such as converting foreign currency into U.S. dollars and deduct these fees and expenses from the dividends and other distributions on the ADRs. Sometimes, however, the foreign company pays the fees in return for the exposure to the U.S. market.

We cover a number of ADRs in our Wall Street Stock Forecaster newsletter. You can see our buy/sell/hold advice on specific ADRs in that publication.

You can get Wall Street Stock Forecaster, with our advice on U.S. stocks written especially for Canadian investors, along with 5 in-depth Special Reports FREE, as well as FREE access to our weekly Email/Telephone Hotlines (which keep you up to date on our U.S. stock market investments between issues) when you subscribe now. Click here to get started right away.

Comments

  • What are the tax implications of holding an ADR in TFSA, Investment Account and RRSP. I have heard that unlike American companies they are subject to a witholding tax which American companies are not subject to if held in an RRSP.

  • Hi Rob

    Thanks for your comment! I’ve passed it on to the editors of The Successful Investor for review. You will receive a response from them via email.

    Regards,

    Alex Conde
    Online Editor
    TSI Network

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