Some of the world’s largest companies are not traded on a U.S. stock exchange. If you want to buy shares of BMW, Samsung or Shell Oil Company, for example, you must purchase the foreign company’s American depository receipts, or ADRs, instead. ADRs are issued by U.S. depository banks, which first purchase shares of a foreign company’s stock, then hold the shares as inventory and finally issue ADRs for trading on the U.S. exchanges. If you buy ADR shares, the depository bank holds your shares electronically unless you decide to convert them into ordinary stock shares.
If you invest through an online brokerage firm, you may be able to convert your ADR shares into ordinary shares through your trading platform. Your broker must trade the ADR shares for you to make the conversion online. After you have entered your trade order, it is forwarded to a processing agent, who can usually complete the conversion within one to three business days. You should see the shares listed in your brokerage account once the conversion is confirmed.
Initiating the Conversion
You can call your broker or speak with a representative at the depository bank and request that your ADRs be converted into ordinary stock shares. You must provide the name of the ADR’s parent company, the number of shares you own and the Committee on Uniform Securities Identification Procedures, or CUSIP, number. You can find this information on your statement or on the depository bank’s website. The depository bank representative or your broker will provide you with the conversion form you must complete and return. This gives the broker or bank representative the authority to act on your behalf.
Converting your ADR shares into stock shares is a two-step process. The processing agent sells your ADR shares through a U.S. exchange. The processing agent then contacts a licensed broker on the foreign exchange to purchase the company’s stock shares. Depending on the stock’s liquidity, the purchase takes place immediately or shortly afterward. The foreign broker may enter the buy as a limit order to try to get a better price. Once the transaction is complete, the foreign broker notifies the processing agent. The stock shares may be electronically placed in your account, or the company may send you a paper stock certificate.
Be prepared to pay a variety of costs and fees to have your ADRs converted. In addition to the stock’s purchase price, your broker or depository bank changes a fee for its part of the transaction. The foreign broker gets a fee for purchasing the shares and may tack on a processing fee as well. You will pay another fee if the company issues a paper stock certificate and has to mail the shares to you or your broker. The costs and fees are automatically charged to and withdrawn from your brokerage account.
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.