Investing In Foreign Stocks
It is possible for any U.S. investor to invest in foreign companies without the need of an offshore brokerage account. How is this done? By the use of ADRs - American Depository Receipts.
The first ADR was created in 1927 by JPMorgan, as a vehicle for U.S. institutional investors to indirectly own shares of Selfridges, the British retail chain, despite U.K. restrictions prohibiting the actual securities from leaving the country.
Today, some 1,812 foreign companies from more than 80 countries have depository receipt programs - and there are currently 462 ADRs listed on national stock exchanges, mostly on the NYSE, which has 328 listed ADRs. Another 940 ADRs trade in the over-the-counter (OTC) market.
Despite their foreign accent, many ADRs have long been household names familiar to U.S. investors, companies like Cadbury Schweppes, Honda, Sony, and Novartis.
ADRs certify that the underlying shares of a non-U.S. company have been deposited with the depositary's custodian in the company's home country.
ADRs most often represent an equivalent number of shares - but occasionally the ratio of ADRs to underlying shares may differ. So, for example, one ADR might represent a fraction of the underlying share while another might represent 2 or 3 shares of the issuing company.
Although ADRs are, in fact, issued by a depository institution, the foreign companies whose shares they represent and which, in most cases 'sponsor' their issuance, are often referred to as the "issuers."
Importantly, ADRs are U.S. securities and, as such, they are regulated by the Securities and Exchange Commission (SEC). They are denominated in U.S. dollars, and like other U.S. securities they trade in dollars. ADR owners also receive dividends in dollars and corporate communications are in English.
ADRs are bought, and sold, and clear just like any U.S. equity - and transactions costs are also similar. As U.S. securities, they can be held by U.S. institutional investors, such as pension plans, which otherwise may be prohibited by their own charters from owning non-U.S. securities.
Depository institutions, such as JPMorgan, provide a variety of services that are important to the retail and institutional investors who buy, hold, and sell ADRs. And one of their most important functions is to create and cancel ADRs in behalf of investors so that the supply and demand for ADRs in the U.S. market remains in equilibrium with the supply and demand for the underlying shares in the home market. This assures that prices in both markets are always comparable, allowing for transactions costs at the current exchange rate.
So, for example, if the price of an ADR on the New York Stock Exchange rises above the price of the underlying security in the home country market, it is these "behind-the-scenes" activities by depository institutions that makes U.S. investment in foreign equities through the mechanism of American Depository receipts virtually indistinguishable from investment in the shares of any American company.
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The first ADR was created in 1927 by JPMorgan, as a vehicle for U.S. institutional investors to indirectly own shares of Selfridges, the British retail chain, despite U.K. restrictions prohibiting the actual securities from leaving the country.
Today, some 1,812 foreign companies from more than 80 countries have depository receipt programs - and there are currently 462 ADRs listed on national stock exchanges, mostly on the NYSE, which has 328 listed ADRs. Another 940 ADRs trade in the over-the-counter (OTC) market.
Despite their foreign accent, many ADRs have long been household names familiar to U.S. investors, companies like Cadbury Schweppes, Honda, Sony, and Novartis.
ADRs certify that the underlying shares of a non-U.S. company have been deposited with the depositary's custodian in the company's home country.
ADRs most often represent an equivalent number of shares - but occasionally the ratio of ADRs to underlying shares may differ. So, for example, one ADR might represent a fraction of the underlying share while another might represent 2 or 3 shares of the issuing company.
Although ADRs are, in fact, issued by a depository institution, the foreign companies whose shares they represent and which, in most cases 'sponsor' their issuance, are often referred to as the "issuers."
Importantly, ADRs are U.S. securities and, as such, they are regulated by the Securities and Exchange Commission (SEC). They are denominated in U.S. dollars, and like other U.S. securities they trade in dollars. ADR owners also receive dividends in dollars and corporate communications are in English.
ADRs are bought, and sold, and clear just like any U.S. equity - and transactions costs are also similar. As U.S. securities, they can be held by U.S. institutional investors, such as pension plans, which otherwise may be prohibited by their own charters from owning non-U.S. securities.
Depository institutions, such as JPMorgan, provide a variety of services that are important to the retail and institutional investors who buy, hold, and sell ADRs. And one of their most important functions is to create and cancel ADRs in behalf of investors so that the supply and demand for ADRs in the U.S. market remains in equilibrium with the supply and demand for the underlying shares in the home market. This assures that prices in both markets are always comparable, allowing for transactions costs at the current exchange rate.
So, for example, if the price of an ADR on the New York Stock Exchange rises above the price of the underlying security in the home country market, it is these "behind-the-scenes" activities by depository institutions that makes U.S. investment in foreign equities through the mechanism of American Depository receipts virtually indistinguishable from investment in the shares of any American company.
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posted by Bob Moser at
3:14 PM
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