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.

Table 17-1
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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