American Depositary Receipts (ADRs) are stock in foreign companies that are traded in the U.S., just as you would buy and sell stock in America, and are valued in U.S. currency, thereby also paying money in U.S. dollars.
American Depositary Receipts represent the acquisition of American Depository Shares, otherwise known as ADSs. Both ADR and ADS are often used interchangeably.
What Are American Depositary Receipts?
An ADS shows that you own a piece of equity in a company outside the U.S. Therefore, the certificate supplies individuals in the U.S. with an easy way to invest in overseas companies. Certificates are bought and sold in the same way that stock is traded on Wall Street.
A slight variation of an American Depositary Receipts is a GDR, or a global depository receipt. A GDR permits companies to raise capital in more than one market concurrently, thereby making it possible to expand their number of shareholders.
American Depositary Receipts Can Be Traded
What is nice about ADRs is that they can be traded in accordance with the marketplace mandates set in the U.S. In addition, they are traded in U.S. currency and pay dividends in U.S. dollars as well. Dividend payments, too, are made on a timely basis.
Ownership of American Depositary Receipts is considered official when the stock owner is recorded on a company’s books. This registration is secured by the depository bank for the American Depositary Receipts.
Therefore, when you own an American Depositary Receipts, you receive all the related materials that shareholders of the foreign company you are investing in obtain as well, such as dividend statements, corporate correspondence, proxy material and annual reports by way of the ADR depository bank.
How To Buy American Depositary Receipts
You can obtain shares in one of two ways:
- Book entry, where shares are shown on an account statement
- Share certificate.
Most shareowners hold book entry shares to reduce the possibility of losing their shares or having them damaged or stolen. In the securities sector, direct registration allows shareholders to use the book entry form of ownership. However, not every company out there provides direct registration for their share certificates.
The terms outlined for ADRs are very similar to the terms provided for the direct purchase of stock in the U.S. Usually, a minimum initial investment of $250 is required and monthly investment minimums are typically $50.
Some plans charge an enrollment fee of approximately $15, which is issued one time. Fees to buy foreign stock generally run around $5.00 plus about 10 cents for each share purchased. Sales charges are assessed at about $10 plus 10 cents per share. You can buy shares approximately two times each month.
To diversify your stock portfolio, you may benefit from researching the investment opportunities offered by ADRs.
Have you ever invested in ADRs? How easy was it to do? Was it any different than investing in American companies?