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There are so many investment options that it can seem overwhelming. Which should I choose? What are the pros and cons of each? Well, I’m here to ease a bit of the pain. Today we’re going to talk about an option that doesn’t often cross the lips of the common American: ADR’s or American Depository Receipt.
#1) What is ADR?
J.P. Morgan was the first to introduce American Deposit Receipts in 1927. In layman’s terms an ADR is a negotiable certificate (issued by a US bank) of a share of a non-US company that trades with US markets. They help reduce admin and duty costs that would be levied on each of the trade transactions.
It is a great way to buy shares of a foreign company while helping support the American economy (because any dividends and capital are gained in American dollars). Although it doesn’t really help the shares of the other country (mostly because the payments are converted to U.S. dollars).
If you want to look up some numbers, ADR’s are listed on NYSE, AMEX, Nasdaq, and OTC. Of course, there is a catch but I’ll get to that in a minute.
#2) How Can It Benefit Me?
They are a great way to augment your investment portfolio and, like any other investment, you are putting your money into a place that will either make you more money or not. Making an investment in a stock market (that’s where you are putting your money if you invest in ADR’s) is always a gamble, but they are often worth it in the end.
The awesome thing about ADR’s is that you will be able to invest your money in a foreign company that might otherwise prohibit or restrict you (as an outsider). Also, this way, you wouldn’t have to deal with weird tax considerations, unfamiliar market practices, and the headaches that come with that.
#3) Are There Any Cons?
It is a bit riskier than investing in regular stocks. For example, a lot of foreign companies don’t report their earnings every quarter. Instead they report once or twice a year. That’s called information risk.
Another example of information risk is the chance that you won’t hear any bad news for six months or so. So what’s the catch that I was talking about earlier? There’s also less analyst coverage about them. Because of that, you can’t keep close tabs on how your money is doing.
#4) Why Should I Bother Then?
Well it really depends on you and what you want to do with your money. Some people prefer to invest their money in stocks, others choose to invest their money in property. If you’re having issues coming to a decision about where to invest your hard earned dollars (in general), then ask yourself these questions (which CNN.com offered):
What are your investment objectives and do you think ADR’s could help contribute to your portfolio (remember to consider diversity in your portfolio as well)?
How much money are you willing to invest (as a whole, and how much of that would you be putting into ADR’s)?
Are you comfortable with the added risks of a foreign economy and the information risk?
Also take note that some advisors suggest that your total investment portfolio should have no less than $100,000 if you plan to pick individual non-US company stocks. They don’t mean that you should invest that much in non-US companies, they mean your overall portfolio (including other investments).
#5) So How Do I Get Into ADR’s?
You can either source new ADR’s or obtain existing ADR’s in a secondary market. You can do this by using the stock exchange. Talk to your local broker for more information on actually purchasing ADR’s.
There are different types of ADR programs depending on what companies (and you) want out of the program. There are unsponsored ADR’s, sponsored level I, sponsored level II, sponsored level III, restricted programs, privately placed, and offshore ADR’s. If you want more information about these different types, I suggest that you check out this brochure put out by J.P. Morgan or this brochure called International Investing.
The key to ADR’s is arming yourself with information. You can do this by checking the financial press (a good source of information on the market as a whole). You can also find out of the company has an investor relations office in America. If you find one, you can call to request their latest annual report. Watch the news to see if the company is making any headlines (good or bad).
We (as women) are often not given the benefit of the doubt when it comes to being well informed about investing our money. So check out those brochures (they are both PDF files), talk to your local brokers, and read up on it. Don’t be afraid to ask questions. Being knowledgeable will allow you to be confident when you make a decision.
This is an interesting topic and thank you for explaining ADR. Is there a limit to how much foreign stock you can hold in your portfolio? Is there a way to get information on how these stocks are doing monthly through international news?
I would never have thought of investing in American Deposit Receipts, thank you for the idea. Considering the risk would this not be beneficial to people with a lot of disposable money? Are there usually more return with these stocks than losses?
What a great idea for investing extra income. Part of being an investor in those markets is being a risk taker, since you go in not knowing how the market will be. I’ll read the brochures to get a sense of the different ADRs.
That was my question. Generally higher risk is associated with higher return. Otherwise, why bother with a product that is more likely to lose money than some other choices?
Are you able to get information about the business practices of foreign companies before investing in them through ADRs? I feel strongly about investing in companies that use ethical practices.