Buying Foreign Stocks Trading as ADRs
An easier way to invest in foreign stocks is to buy American depository
receipts (ADRs), or shares of foreign companies traded in U.S.
dollars. ADRs are negotiable receipts that represent ownership of
the shares of foreign companies traded on the American securities
markets. The ADRs are issued by American banks, which hold in
trust the shares representing the ADRs. Each ADR certificate represents
a percentage ownership of the securities held in trust.
ADRs work in the following way: When a broker receives an
order to buy 100 shares of an ADR such as Glaxo Smith Kline, the
British pharmaceutical company, the broker will pass this order on
to either the brokerage firm’s London trading desk or another
British firm’s trading desk. The foreign firm will buy the stock,
which is then deposited with the custodian bank. The custodian
bank authorizes the American depository bank to issue an ADR
certificate, which is then sent to the brokerage firm. The broker
sends the certificate to the investor in the same way as it would be
done for the purchase of a domestic stock.
For actively traded ADRs, brokers don’t need to fill the orders
from abroad because there are so many ADR certificates in circulation
in the United States. Large brokerage firms often can match the
buy and sell orders of the large, actively traded ADRs from their
own inventories. When selling ADRs, the process described earlier
is completed in reverse.
ADRs give U.S. investors the opportunity to buy and sell foreign
companies’ stocks with the same ease as the stocks of U.S.
companies. ADR buy and sell transactions are completed in the
same period of time (three days) it takes for American stocks.
ADR holders have voting rights and may participate in the
rights offerings if the company registers with the Securities and
Exchange Commission (SEC). If the company does not register
with the SEC, the ADR bank will sell the rights and remit the value
to the ADR shareholders.
There are two forms of ADRs: sponsored and unsponsored.
Sponsored ADRs are those issued through banks by the foreign companies
that have registered with the SEC. Unsponsored ADRs are of
companies that have not fully registered with the SEC; their shares
trade on the over-the-counter (OTC) markets.
Even though investors can trade ADRs on the markets as easily
as they can domestic stocks, they are still exposed to many of the
risks outlined earlier. ADRs trade in dollars on the U.S. markets,
which eliminates the need to exchange dollars for a foreign currency.
However, the value of the ADR is influenced by exchange rates.
When the dollar declines relative to a foreign currency, a foreign company’s
stock is worth more when it is converted into dollars.
Some Selected ADRs
Conversely, when the value of the dollar increases, the foreign currency
is worth less. When dividends are paid, the issuing bank
receives and distributes them to the ADR holders minus their fees.
Information on the companies issuing ADRs is increasing
owing to demands of U.S. investors to diversify their portfolios
(see Table 17–1 for a list of some of the ADR stocks). However,
information on these companies is still not as readily available as it
is for domestic companies.
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