American Depositary Receipts
An American depositary receipt (ADR) is a negotiable certificate that trades like a common stock and is issued by a U.S. bank; it represents shares of a non-U.S. publicly traded company. ADRs are priced in U.S. dollars, and dividends are paid out in U.S. dollars. The actual shares of the foreign company are held by a custodian bank in the company's home country, subject to the terms specified on the ADR certificate.
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An investor has multiple options when choosing to invest in foreign securities. Investing in mutual funds that buy foreign stock is the simplest way, but what about investors who want to pick and invest in individual stocks? One option is to buy shares on a foreign exchange. However, the transactions are denominated in the exchange's home currency, you or your broker must have access to that foreign exchange in order to place trades, and you have issues of international settlement, global custody, foreign brokerage, currency conversions and multi-currency accounting. This method can be cumbersome and costly.
A handful of foreign companies list their stock on U.S. exchanges, but the number of companies that do this is small due to high costs and strict regulations. The New York Stock Exchange, for instance, allows non-U.S. companies to be listed on the exchange if the company meets all requirements both for the exchange and the SEC, pays a dual-listing fee, and produces frequent reports in English for traders.
ADRs allow U.S.-based investors to bypass these obstacles when investing in foreign stocks.
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