An American Depositary Receipt, or ADR, is a certificate that represents a foreign stock that trades in the United States. Banks and brokerage firms in the U.S. issue or sponsor ADRs, and investors buy and sell them on U.S. stock markets, just like regular stocks.

If you own an American Depositary Receipt, you have the right to obtain the foreign stock it represents. However, investors usually find it more convenient to continue holding ADRs as part of their strategy for portfolio diversification.

Each American Depositary Receipt may represent one or more shares of the foreign stock. However, if the stock is expensive, the ADR may represent a fraction of a share. That way, the ADR will start trading at a moderate price, or be in range of similar stocks on the exchange where it trades. The price of an ADR usually stays close to the price of the foreign stock in its home market.

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ADRs make foreign investing much easier and safer for individual investors. The foreign company must provide detailed financial information to U.S. regulators, and to the sponsor, or “depositary,” bank or broker. Since ADRs trade on U.S. stock market, you don’t have to worry about exchange rates, foreign stock-exchange rules, or the language barrier. Price information is readily available, and transaction costs are lower. Trades will clear and settle in U.S. dollars. As well, the depositary bank or broker will convert any dividends or other cash payments into U.S. dollars before it sends them on to you.

Depositary banks that issue ADRs sometimes charge fees for their services; also they incur expenses for services such as converting foreign currency into U.S. dollars and deduct these fees and expenses from the dividends and other distributions on the ADRs. Sometimes, however, the foreign company pays the fees in return for the exposure to the U.S. market.

We cover a number of ADRs in our Wall Street Stock Forecaster newsletter. You can see our buy/sell/hold advice on specific ADRs in that publication.

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