American depository receipts, or ADRs, are a way for foreign companies to make stock shares available to U.S. investors. In your brokerage account, ADR shares look like any other stock. However, your ADR investments give you exposure to companies and economies around the world.
Foreign Company Shares
ADR shares are foreign company shares trading on the U.S. stock exchanges or in the over-the-counter markets. ADR shares have stock symbols, and investing in these foreign companies is no different from investing in a U.S. company. Through ADRs, investors can invest in name-brand foreign companies such as Toyota or Sony. Hundreds of companies -- ranging from small to large companies representing a wide range of countries -- list as ADRs in the U.S.
Shares Held in Trust
ADR shares listed in the U.S. are backed by foreign company shares held in trust by a U.S. bank. An ADR share may be backed by one -- or a number -- of the foreign stock exchange shares. For example, each ADR share of New York Stock Exchange-traded Banco de Chile is backed by 600 shares from the Chilean stock exchange. The share ratio may become important if the company publishes income and dividends per share based on the home country shares and currency and you want to convert those per-share results to per-ADR share figures.
Results in Dollars
Investing in foreign companies using ADR shares allows U.S. investors to participate in a company's results with share price gains and dividends converted to U.S. dollars. The trustee bank that holds the foreign shares backing an ADR will collect dividends paid in foreign currency and convert those dividends to dollars before the money is paid out to ADR shareholders. Some countries require that taxes be withheld from dividend payments, and that task will also be handled for ADR investors.
A significant number of ADRs trade in the over-the-counter markets rather than on the stock exchanges. Some large companies have chosen the OTC route, including Swiss company Nestlé and Walmart de Mexico. OTC-traded ADRs may be sponsored or unsponsored shares. A sponsored ADR is approved and backed by the foreign company behind the shares. An investor looking at an OTC ADR should verify whether the ADR shares are sponsored and may want to stay clear of unsponsored shares.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.