1.5  American Depository Receipts

Americans can invest in foreign markets in a variety of ways. An investor may buy mutual funds or exchange-traded funds that contain foreign stocks. Americans may also invest directly in foreign markets; however, depending on the country, this can be complex and difficult. American Depository Receipts (ADRs) are a popular way to get exposure to international stocks without the potential headaches and work associated with direct investing.

ADRs are receipts issued by a U.S. bank that represent shares of a foreign stock. ADRs are traded on U.S. exchanges. The purpose of ADRs is to make it easier for U.S. investors to trade shares of a foreign-based corporation in the U.S. stock market.

ADRs allow investors to avoid many of the costs and inconveniences associated with trading on a foreign exchange, such as currency exchange rates, foreign regulations, commissions, and other transaction costs. Thus, ADRs permit American investors to buy and sell foreign securities within the safety of the U.S. stock markets.

Here’s how they work. A bank in the U.S. purchases the issuing company’s shares in the issuer’s home country. This U.S. bank is called the depository bank. The depository bank deposits the purchased shares in a bank located in the issuer’s country, called the custodian bank.