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What are ADRs? - How to invest in companies from around the world

Companies from around the world are made available on the US stock market by means of American Depository Receipts (ADRs), which are traded just like regular stocks. ADRs are negotiable certificates that represent shares of foreign companies. 

American Depository Receipts give US investors access to geographical diversification* and also benefit foreign firms by providing an alternative to the hassle and expense of listing themselves on US stock exchanges. 

“To offer ADRs a U.S. bank will purchase shares on a foreign exchange. The bank will hold the stock as inventory and issue an ADR for domestic trading. ADRs list on either the New York Stock Exchange (NYSE), American Stock Exchange (AMEX), or the Nasdaq, but they are also sold over-the-counter (OTC)” - Investopedia

*Diversification does not guarantee investors will not lose money and this kind of investment strategy doesn’t make portfolios immune to risk - especially when it comes to systemic risk (which affects a market in its entirety). Moreover, although diversification can reduce risk, it can also reduce reward. By reducing your exposure to any single investment and protecting you on the downside, diversification limits you on the upside as well. Always consider your own investment preferences and objectives. 


Risks associated with ADRs*

Many ADRs are sold in the OTC market (over-the-counter), which implies some level of counterparty risk. The issue with OTC stocks is that they are typically subject to less regulation and are traded without the intermediation of a central exchange or broker. 

In addition, dividend payments from ADRs are converted to U.S. dollars, net of conversion expenses and foreign taxes. In general, the bank that issued the ADR automatically withholds the necessary amount to cover the expenses and foreign taxes.

*Like any other investment, you should learn as much as you can about a company before you invest. Research the political, economic, and social conditions in the company’s home country so you will understand better the factors that affect the company’s financial results and stock price. You should understand that non-U.S. companies are subject to financial and other disclosure requirements that differ from those required of U.S. public companies. Except for the annual report on Form 20-F, non-U.S. companies are generally only required to disclose what is required in their home country. Any disclosure may also not be as extensive or comparable to that of U.S. public companies.

 

Here are a few ADR examples

According to The Balance, some of the most popular ADRs are Teva Pharmaceutical Industries Ltd. (TEVJF), Alibaba Group Holdings Ltd. (BABA), and Vale SA (VALE):

Teva Pharmaceutical Industries Ltd. (TEVJF) - Israel-based pharmaceutical company focused on generic drugs and specialty medicines that are sold on a global scale.

Alibaba Group Holdings Ltd. (BABA) - Chinese multinational technology company specializing in e-commerce, retail, Internet, and technology.

Vale SA (VALE) - Brazilian multinational corporation engaged in metals and mining and one of the largest logistics operators in Brazil.


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