An American depository receipt (ADR) is a security that represents indirect ownership of shares of a foreign company that isn’t directly traded on U.S. exchanges. American banks purchase the shares through their foreign branches and make them available to investors in the U.S.
ADRs are one of the most important items in an international investor’s tool kit. When you buy an ADR, you technically don’t own the foreign stock directly. Instead, you own a piece of paper that entitles you to one or more shares of a foreign stock being held on your behalf at a depositary bank. Learn more about how this process works, along with the pros and cons of ADRs.
What Are American Depositary Receipts?
Not all foreign companies trade directly on U.S. exchanges. With American depositary receipts, however, investors can still own shares of many of these companies. Banks and other financial institutions can purchase shares of foreign companies through their foreign branches and then sell ADRs in the U.S. as a form of indirect ownership. These ADRs entitle the purchaser to the foreign stock they represent, even though the bank still has title to the underlying stock.1
The first ADR was created in 1927 by J.P. Morgan, to allow Americans to invest in shares of a British department store. Today there are more than 2,000 ADRs available, representing shares of companies located in more than 70 countries.2 The Bank of New York, JPMorgan Chase, Deutsche Bank, and Citigroup are among the leading depositary banks, which create and issue ADRs.
The popularity of ADRs has surged over the years because they have a number of distinct advantages that appeal to both small investors and professional money managers alike.
How ADRs Work
Say you’re interested in investing in France. One option is to open a brokerage account in Paris, wire some money over there, convert your dollars into euros, and then go shopping for French stocks. This would be a difficult and time-consuming process, and your accountant would hate you at tax time.
ADRs are designed to eliminate these hassles. Instead of dealing with currency conversions and opening foreign accounts, you can purchase ADRs of French companies that banks and brokers make available on the American exchanges or over the counter.