ADRs: The Easy Way To Diversify Your Portfolio

If you’re looking for a relatively easy way to diversify your portfolio with international investments, you may want to consider trading ADRs. 

ADRs offer investors a hassle-free way to purchase shares of international companies without having to deal with foreign markets or contend with hefty overseas banking fees. 

Here’s a comprehensive overview of what ADRs are so that you can decide whether they’re an investment method of interest to you.

What Does ADR Mean?

ADR stands for American Depositary Receipt (sometimes also spelled depository). 

An ADR is a security that allows foreign companies to trade on the US financial exchanges. 

A Practical Example of Trading ADRs

Think of it this way: 

Say you wanted to buy shares of the stock of a Swiss chocolate company. You’d need to set up a Swiss brokerage account, deal with converting currencies, overseas bank fees, time-zone differences, and many more headaches. 

However, ADRs allow you an easier option for investing in the company. 

ADRs allow shares of the non-U.S. company to be traded on the U.S. exchanges via depositary banks that manage the currency and local tax issues. These shares or securities are called American Depositary Shares (ADSs). 

So, it’s a way to easily invest in a business like the aforementioned Swiss chocolate company without having to jump through so many hoops.

How Do American Depositary Receipts Work?

If you’re not buying shares of a foreign stock directly, how do ADRs work?

It starts with a foreign company wanting to be listed on the U.S. exchanges.  Provided that they meet certain requirements, they can issue a depositary receipt, which can be traded like stocks. 

Let’s go back to the example of the Swiss chocolate company. Say this company wants to be listed on the U.S. exchanges. The way it moves forward is that a U.S. broker purchases the shares from the company, then they’re handled through a local custodian bank while they make their way to the depositary bank. 

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