American Depository Receipts: How To Invest In Foreign Companies By Buying ADRs

Most people are familiar with their country's primary stock market and the shares of major publicly-traded companies that are available to buy and sell, which would be the New York Stock Exchange for the United States and the London Stock Exchange for Britain. Buying shares of a corporation that is headquartered in your own country is simpler than buying shares of a corporation that is headquartered in a different country, because you will be dealing with differences in exchange rates and also different international tax standards.

For example, most people in the United States will have heard of the oil company British Petroleum and many people in Britain will have heard of the oil companies Exxon Mobil and Chevron, but investing in a company outside of your home country is a little bit more complicated than investing in a company in your own country. Because of the complication arising from dealing with a different currency and a different stock exchange, the solution that was introduced in 1927 in the United States is called an American Depository Receipt, which is issued or sponsored by a major bank or brokerage and will trade just like a regular stock that will represent a specified number of shares in a foreign corporation.

This is an easy to understand solution for investing in a foreign company without the need to deal directly in the currency that the foreign company is located in. When you take the share price of a company that trades as an American Depository Receipt or ADR and then compare that price with the share price for the company on their native stock market, the price will not usually be the same. This is because a U.S. Bank or brokerage will purchase a large lot of shares from a foreign company and then reissue them for sale on the American stock market at a certain ratio of a number of foreign shares per ADR share.

While American Depository Receipts do not eliminate the exchange rate risk associated with investing in a foreign company, they do eliminate the extra complication of opening up a bank account denominated in a foreign currency in order to buy shares of a foreign company. Overall, investing in American Depository Receipts or ADRs can give American investors the opportunity to diversify their stock portfolio into other foreign companies just as easily as they can invest in domestic companies, which can allow investors to take advantage of overseas growth opportunities.

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