American Depository Receipt

ADRs or American Depository Receipts are one of the most imperative items in the tool kit of international investors.

Defining ADRs

An investment institution or a US bank fills its vault with a specific amount of stock of some foreign investing company called the ‘depository’ and thus enabling the investor to buy the shares form that anthology of stocks that have prices in US dollars.

In the easiest words, US investors can access to the foreign markets sitting in their living room or even lying on their bed while enjoying the warmth of the fire pit.

Mining the Roots

Let us suppose that while sitting in the US, you are attracted by an invest opportunity in France. One way to access this opportunity is opening a brokerage account in Paris, transfer the money through wire and then shop for French stocks after converting your dollars into Euros. The process is as lengthy as it the sentence to describe it and your accountant will not like you at tax time.

ADRs work in this situation. They are securities representing the ownership of shares by a foreign company. Buying an ADR does not entitles you the ownership of foreign shares directly in the technical sense, rather you hold the ownership through a legal document held at a depository bank on your behalf.

With their distinct and appealing advantages, ADRs’ popularity has gushed over the years and equally favored by small investors as well as professional money managers.

Advantages of ADRs

• ADRs have high liquidity like the shares of Coca-Cola and IBM and can be bought or sold easily.
• There is no need of a new broker or a foreign brokerage account; the broker you usually deal with can help you.
• The prices as well as the dividends are dealt in U.S dollars.
• ADRs are traded in the U.S. market hours and all the settlement and clearing procedures are subject to those for American stocks.
• You have freedom to customize your portfolio according to your needs and interest in stocks of other countries whenever you like.

Disadvantages of ADRs

• Besides all those attractions, ADRs have some pitfalls as well.
• Exchange rate risk: Although ADRs are dealt in dollars for convenience but fluctuations in foreign currency values expose your investment to risks.
• Liquidity: There are a large number of companies having ADR programs but still some are very thinly traded.
• Limited selection: Not all foreign companies offer ADR trading. You can buy Japan’s Toyota Motor‘s ADR but can do the same with Germany’s BMW.
• Since ADRs are just like stocks, you have to buy them in large to ensure ample diversification.

The Bottom Line

Once you get some hand on experience with the international investment, you can grab great benefits from customization of your portfolios. But if you are just a debut or with little experience then you should opt for some ETF or good international mutual fund until you find yourself confident enough to take that plunge.