Question of the Week

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

a) An option to purchase a stated number of shares of a common stock at a stated price
b) Trade foreign securities in U.S. markets
c) Trade U.S. securities in foreign markets
d) Fixed income security portfolio managed by a corporate trustee

Answer:

The correct answer is b):

ADRs are used to trade foreign securities in the United States. Instead of buying shares of foreign companies in the overseas markets, investors can buy shares in the U.S. in the form of ADRs. This entitles the investor to capital gains/losses and dividends, but it does not eliminate currency risks.