An ADR allows US investors easier access to ownership of foreign public companies. They are also beneficial for foreign companies as they enhance investor interest in their shares beyond their own domestic market.
ADRs are issued by a US bank in the form of a negotiable certificate, each of which represents a certain number of shares of a foreign stock on a US exchange. They are priced at a level that may be most appropriate to ensure maximum investor interest.
If the ADR share price is too high, it may discourage some investors from investing. This may give the impression that it’s “expensive” or deter investors from purchasing shares in any significant volume. On the other hand, if the share price is too low, the ADR may appear more speculative.
Common exchanges for ADR listing include the NYSE, NASDAQ, and occasionally over-the-counter (OTC).
ADRs are issued in US dollars, receive dividends and capital gains in US dollars, and the underlying security is held by a US bank overseas. Dividends, however, will be converted from the company’s domestic currency to US dollars. This exposes ADRs to foreign exchange risks, currency conversion fees, and foreign taxes.
Nonetheless, before ADRs were first created in 1927, US investors were forced to buy non-US listed companies on foreign exchanges. With currency risk and regulatory disparities, there became market demand for US-based products to ease concerns over these drawbacks.
Each company listed on public exchanges is subject to the laws implemented by each country or jurisdiction’s regulatory body. Accordingly, foreign companies could provide financial information in such a way that is subject to very different presenting or accounting standards relative to what might be enforced by the Securities Exchange Commission (SEC), the US-based agency that oversees the US securities industry. This could lead to investors misunderstanding important information regarding a company’s financials.
ADR Trading for Day Traders
ADRs are a convenient way for US-based day traders to receive access to foreign shares without needing to transact on foreign exchanges. Given ADRs must comply with SEC regulations and domestic accounting standards, the company can be realistically compared alongside industry competitors.
Popular ADRs include Alibaba (BABA), Teva Pharmaceutical (TEVA), Vale SA (VALE), and JD.com (JD).