An American Depository Receipt (ADR) is a security that allows investors to invest in non-U.S. companies listed on U.S. stock exchanges. ADRs represent ownership of a specified number of shares of a non-U.S. company and are issued by U.S. depository banks. ADRs are traded on U.S. stock exchanges and are denominated in U.S. dollars, making them more accessible to U.S. investors than directly investing in foreign stocks.
ADRs are issued in two types: sponsored and unsponsored. Sponsored ADRs are issued by a non-U.S. company in partnership with a U.S. bank, while unsponsored ADRs are issued by a U.S. bank without the cooperation of the non-U.S. company. Sponsored ADRs generally have more stringent reporting requirements than unsponsored ADRs, making them more attractive to investors.
Investors can purchase ADRs in the same way as they would buy U.S. stocks, through a broker or online trading platform. When an investor purchases an ADR, they are essentially buying an ownership stake in the underlying non-U.S. company, and the value of their investment will be affected by the performance of the non-U.S. company in its local market.
One of the benefits of investing in ADRs is that they provide investors with exposure to non-U.S. companies without the need to navigate foreign markets or currencies. ADRs are also subject to U.S. securities regulations, providing investors with a higher level of protection than direct investments in foreign stocks. In addition, ADRs may provide investors with access to higher dividend yields than U.S. stocks, as some non-U.S. companies have higher dividend payout ratios than U.S. companies.
However, there are also some risks associated with investing in ADRs. One risk is currency risk, as the value of an ADR may be affected by fluctuations in the exchange rate between the U.S. dollar and the currency of the non-U.S. company. Another risk is political and economic risk, as non-U.S. companies may be subject to political instability, economic downturns, or other risks that could negatively affect their performance.
In summary, ADRs are a type of security that allows investors to invest in non-U.S. companies listed on U.S. stock exchanges. They provide investors with exposure to non-U.S. companies without the need to navigate foreign markets or currencies. However, they also carry some risks, such as currency and political risk, that investors should consider before investing.