American Depository Receipts – Great Way To Invest Internationally

by Hank Coleman

How many of the companies that you deal with on a daily basis are based overseas? For example, I wear Adidas tennis shoes, play video games on my Nintendo Wii, while watching my Sony television, munching on Cadbury Schweppes chocolate, and drinking a nice Heineken. I love all of those companies. But, how can I profit from their success and my outpouring of financial support to them? They are international companies based overseas after all, but there is an easy way to invest in them nevertheless. American Depository receipts are an easy way to invest in foreign companies for stock investors.

What Are American Depository Receipts?

american depository receiptsAmerican Depository Receipts, which are also called ADRs, were introduced in the United States in 1927 and were introduced to American investors at a time in history when it was hard to invest in international companies. Today, that is not the case. Investors can now invest in companies in almost every country around the world no matter how small or emerging their market is thanks to the influx and popularity of international mutual funds and bonds that have flooded the investor market. But, if you want to own a share in the company yourself like buying shares through a Dividend Reinvestment Plan (DRIP) or discount stockbroker, ADRs is an easy mean to own shares in international companies.

The Benefits Of American Depository Receipts

There are many benefits to owning American Depository Receipts. ADRs offer an investor lower feels when they are compared to many international mutual funds. Investors have to only pay for their broker’s standard commission when they purchase ADRs. The investments also help an investor diversify his or her stock portfolio with companies that spread risk around throughout the globe. Only approximately 40% of stocks traded around the world are American companies. That leaves a lot more from abroad that can be in your portfolio.

The Drawbacks Of American Depository Receipts

Like all international stocks, mutual funds, and other foreign investments there are unique risks that are associated with them that are not usually present a home. Investors must consider country risk, currency risk, and other attributes when dealing with American Depository Receipts. Another big drawback of ADRs is that international companies and their underlying countries do not have as strict financial reporting standards as the United States. There may also be trouble understanding financial reports, terms, and definitions thanks to language barriers.

How To Invest In American Depository Receipts

An ADR trades on the US stock exchange just like a domestic company does. ADRs are issued and sponsored by a host bank. American Depository Receipts are bought in the exact same fashion you buy a share of your favorite American stock. You can purchase shares of ADRs through your discount or full service stockbroker. Some ADRs are also available through dividend reinvestment plans.

American Depository Receipts are an excellent choice for an investor who wants more diversity and international exposure within their investment portfolio. ADRs allow investors a relatively cheap alternative to investing in international mutual funds and enable investors to buy shares directly on US stock exchanges.

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{ 2 comments… read them below or add one }

Money Obedience August 11, 2010 at 12:09 pm

Some ADRs are fully registered in the US, whose companies have to follow US reporting standards. Other ADRs do not trade very well in the US which makes it very expensive for a retail investor to buy and sell these instruments.

Premium Finance August 12, 2010 at 4:06 am

Amazing read. Interesting take on finances. This is a very important aspect of peoples’ lives nowadays.

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