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. Which of the following best describes American Depository Receipts (ADRs) ...

    The correct answer is b): ADRs are used to trade foreign securities in the United States. Instead of buying shares of foreign ... Read Answer >>
  2. 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 >>
  3. How are American Depository Receipts (ADRs) priced?

    Understand what American depositary receipts are and how they work, including how the price of ADRs is determined by the ... Read Answer >>
  4. 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 >>
  5. What factors must a company consider before establishing an American Depository Receipt ...

    Learn which factors a foreign company must consider before establishing an American Depository Receipt, or ADR, program in ... Read Answer >>
  6. 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 >>
Related Articles
  1. Personal Finance

    Depository Trust Company

    The Depository Trust Company, founded in 1973 and based in New York City, is one of the world's largest securities depositories.
  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

    Investing in Foreign Stocks: ADRs and GDRs

    Depositary Receipts are easy ways to invest in foreign stocks, regardless of what part of the world you live in.
  4. Investing

    How To Trade Foreign Stocks

    We weigh the major ways to trade foreign stocks for investors.
  5. Insights

    What Do the Federal Reserve Banks Do?

    These 12 regional banks are involved with four general tasks: formulate monetary policy, supervise financial institutions, facilitate government policy and provide payment services.
  6. 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. ...
  7. Investing

    Playing It Safe In Foreign Stock Markets

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

    The 3 Biggest Risks Faced By International Investors

    Investing internationally is a great way to diversify your portfolio, but you need to know the risks.
  9. Investing

    How The U.S. Government Formulates Monetary Policy

    Learn about the tools the Fed uses to influence interest rates and general economic conditions.
  10. Investing

    Investing Beyond Your Borders

    Investing abroad poses risks, but can also help you diversify. Discover ways to invest in foreign stocks.
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. International Depository Receipt - IDR

    A negotiable certificate issued by a bank representing ownership ...
  4. European Depository Receipt - EDR

    A negotiable security (receipt) that is issued by a European ...
  5. Canadian Depository For Securities Limited - CDS

    Canada's national securities depository, clearing and settlement ...
  6. Sponsored ADR

    An American depositary receipt (ADR) issued by a bank on behalf ...
Hot Definitions
  1. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  2. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  3. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  4. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  5. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  6. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
Trading Center