A:

For domestic investors the benefits of increasing the portion of their portfolio that they invest in foreign companies is becoming clearer, and clearer. The easiest way for an investor to do this is by investing in American Depository Receipts (ADRs). An ADR is a financial product that is issued by a domestic depository bank and is traded on the domestic exchanges such as the New York Stock Exchange (NYSE) and the Nasdaq. ADRs represent shares in a foreign company, but they eliminate the need for investors to purchase those shares in the company's local market and in that market's currency.

There are many depository banks that issue ADRs in the United States. The biggest one being the Bank of New York. These depository banks help with the setup and operation of a company's depository receipt program. These banks often will offer to provide these issuing services to companies for free. This raises the question, what benefit is the bank receiving for providing such a service?

When a depository receipt is issued by a depository bank, the bank has actually purchased the equivalent amount of shares in the local market. Those shares are held by a local custodian bank for the depository bank. The depository receipts can then be traded normally in the American market as any other stock would trade. If for some reason a depository receipt is canceled, it is no longer traded in the American market. The ADRs are returned to the depository bank and the shares held by the local custodian are released back into the local market.

Although the depository banks must do a lot to issue a new ADR, they receive no real benefit from the foreign company. The benefit the depository bank receives occurs whe the ADR is ultimately sold into the market. The depository bank receives a commission on the trade, just like any other trade. Often times depository banks will also deduct their fees from dividends that investors are to receive. They may also pass on expenses related to currency conversion to investors. It is through these fees and expenses that they charge to investors that depository banks benefit from issuing ADRs.

To learn more, see What Are Depository Receipts, American Depository Receipt Basics, and Investing Beyond Your Borders.

RELATED FAQS
  1. How are American Depository Receipts (ADRs) exchanged?

    Learn specifics about American depositary receipts, including how they are exchanged and some of their advantages and disadvantages. Read Answer >>
  2. Why would an investor want to hold an American Depository Receipt rather than the ...

    Learn about the advantages for investors of using American Depositary Receipts instead of investing directly in the underlying ... Read Answer >>
  3. What are the differences between Levels I, II, and III American Depository Receipts ...

    Understand the difference between sponsored American depositary receipts categorized within Level I, II or III. Read Answer >>
  4. Does a company's American depositary share equal one share of common stock?

    American depositary shares (ADS) come into play when a foreign company wants its shares to trade on a major American exchange. ... Read Answer >>
  5. Why are big foreign companies considering delisting their American depositary receipts?

    American depositary receipts (ADRs) were developed to give investors an easier way to invest in foreign companies. An ADR ... Read Answer >>
  6. What parties are involved in the creation of an American depositary receipt?

    An American depositary receipt (ADR) is a legal certificate issued by a recognized U.S. bank that represents a specific number ... Read Answer >>
Related Articles
  1. Financial Advisor

    Introduction To American Depository Receipts ADRs

    ADRs can open up a whole new world for investors. Find out what they are and how they work.
  2. Investing

    An Introduction To Depositary Receipts

    Learn about a security that allows you to invest in a foreign company through your local exchange.
  3. Investing

    How To Trade Foreign Stocks

    We weigh the major ways to trade foreign stocks for investors.
  4. Investing

    Introduction To American Depositary Receipts (ADRs)

    Investors should look beyond the confines of the U.S. borders to diversify and maximize returns. ADRs are one way to diversify your portfolio and help you achieve better returns when the U.S. ...
  5. Insights

    Most Powerful And Influential Public Companies In 3 Metrics

    There are many ways to rank the word's most powerful companies. Looking at market value, brand value or sales revenue are all methods used to rank the biggest companies in the world.
  6. Investing

    Playing It Safe In Foreign Stock Markets

    Find out some of the lower-risk ways to invest in foreign markets.
  7. Investing

    How The U.S. Government Formulates Monetary Policy

    Learn about the tools the Fed uses to influence interest rates and general economic conditions.
RELATED TERMS
  1. Government Depository

    Libraries through the United States and its territories where ...
  2. SEC Form F-6EF

    A filing with the Securities and Exchange Commission (SEC), also ...
  3. European Depository Receipt - EDR

    A negotiable security (receipt) that is issued by a European ...
  4. International Depository Receipt - IDR

    A negotiable certificate issued by a bank representing ownership ...
  5. Depository

    On the simplest level, depository is used to refer to any place ...
  6. Sponsored ADR

    An American depositary receipt (ADR) issued by a bank on behalf ...
Hot Definitions
  1. Dumping

    In international trade, the export by a country or company of a product at a price that is lower in the foreign market than ...
  2. Tender Offer

    An offer to purchase some or all of shareholders' shares in a corporation. The price offered is usually at a premium to the ...
  3. Ponzi Scheme

    A fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns ...
  4. Dow Jones Industrial Average - DJIA

    The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange ...
  5. Revolving Credit

    A line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is ...
  6. Marginal Utility

    The additional satisfaction a consumer gains from consuming one more unit of a good or service. Marginal utility is an important ...
Trading Center