What is the primary benefit for an American investor when purchasing an American depositary receipt ADR )?

ADRs are securities listed on U.S. exchanges that represent ownership of shares in foreign companies. For companies based outside of the U.S., listing shares directly on American exchanges like the NYSE or Nasdaq is a complicated and expensive process. However, American investors may want to purchase shares of these companies to diversify their portfolios and gain exposure to new markets. ADRs make it easy for American investors to do this.

To offer ADRs to investors, American banks first purchase shares of foreign companies on foreign exchange(s). Then, the banks issue the ADRs, which are certificates denominated in American dollars that represent the foreign shares and can be traded on an American stock exchange.

An ADR may represent a single foreign share, a fraction of a share, or a bundle of shares depending on the price the bank wants to list the ADR for. Many banks will divide or group foreign shares so the ADR price aligns more closely with typical prices on American stock exchanges. Holding an ADR is similar to owning a share in the foreign company, so ADRs still may pay dividends and are subject to capital gains taxation in American dollars.

Robinhood offers certain ADRs for trading on our platform, but not all.

Some banks require investors who hold ADRs to pay periodic services fees (sometimes called “custody fees”), which typically run between $0.01 to $0.03 per share. If you purchase a share from a company that’s based outside the U.S. on Robinhood, you can find information about any ADR fees that may apply on the website of the bank issuing the ADR.

Just like all other securities, there are certain benefits and risks associated with ADRs.

Potential benefits:

• Increased diversification: ADRs can help American investors build a more geographically diverse portfolio.

• Lower cost: Investing directly in foreign markets can be expensive, so ADRs generally help to lower that barrier to entry.

__Potential risks: __

• Exchange rate fluctuations: If the currency in the issuing company’s country drops relative to the U.S. dollar, that can bring down the value of your investment.

• Political upheaval: Regime changes in the issuing company’s country can negatively impact the exchange rate or destabilize the company in some other way, and American investors often do not have as much context on how these factors can affect their investment.

• Inflation risk: If the issuing company’s country is experiencing rising inflation, that can lower the value of their currency.

• Access to different information: Not all foreign companies provide shareholders with the same type of information that American companies do, and language barriers can make it difficult to access the information that is available.

Why is my ADR no longer trading?

Occasionally, the American bank responsible for custodying the shares will terminate the ADR while the underlying foreign stock is still active. There are three ways that this is generally handled:

Scenario 1: Shareholders automatically receive cash for their ADR shares.

Scenario 2: Shareholders have a six-month window where they can voluntarily convert their ADR shares into the underlying foreign shares. After that six-month window, the foreign shares are automatically sold and holders receive cash.

Scenario 3: The ADR shares are automatically converted into the underlying foreign shares. Because Robinhood cannot support the underlying foreign shares, customers will need to work with the company’s transfer agent to receive physical stock certificates.

Still have questions?

The decision to terminate an ADR isn’t made by Robinhood. If you have questions about why an ADR was terminated, we suggest contacting the holding bank’s investor relations team to learn more.

Diversification does not ensure a profit and cannot protect against losses in a declining market All investments involve risk and loss of principal is possible.

Robinhood Financial LLC is a registered broker dealer (member SIPC). Robinhood Securities, LLC provides brokerage clearing services. Robinhood Crypto, LLC provides crypto currency trading. All are subsidiaries of Robinhood Markets, Inc. (‘Robinhood’).

Reference No. 1392148, 1439761

Key Takeaways

● An American Depositary Receipt (ADR) is a certificate issued by a US bank that represents shares in foreign stock.

● ADRs represent an easy, liquid way for US investors to own foreign stocks.

● The pros of ADR include easy tracking and trading, availability through US brokers, denomination in dollars, and may help provide portfolio diversification.

● The cons of ADR include double taxation, a limited selection of companies and other fees that investors may incur.

Understanding ADR

American Depositary Receipt (ADR) refers to a negotiable certificate issued by a US depositary bank representing a specified number of shares of a foreign company's stock.

The ADR trades on US stock markets as any domestic shares would. ADRs offer US investors a way to purchase stock in overseas companies that would not otherwise be available.

Foreign firms also benefit as ADRs enable them to attract American investors and may be able to raise capital without the hassle and expense of listing on US stock exchanges.

ADRs are created when a non-U.S. company or an investor who holds the underlying foreign securities delivers them to either a "depositary" bank in the U.S. or a custodian in the foreign company's home country.

ADRs are listed on either the New York Stock Exchange (NYSE) or the Nasdaq, but they are also sold over-the-counter (OTC).

An ADR may represent the underlying shares on a one-for-one basis, a fraction of a share, or multiple shares of the underlying company.The depositary bank will set the ratio ofADRsper home-country share at a value that they feel will appeal to investors.

Because of arbitrage, an ADR's price closely follows that of the company's shares on its home exchange. (Note: Remember that arbitrage refers to buying and selling the same asset at the same time in different markets, which allows traders to profit from any differences in the asset's listed price. )

Before ADRs were introduced in the 1920s, American investors who wanted shares of a non-US listed company could only purchase them on international exchanges, an unrealistic option for an average person back then.

ADRs were developed due to the complexities involved in buying shares in foreign countries and the difficulties associated with trading at different prices and currency values.

J.P. Morgan's (JPM) predecessor firm Guaranty Trust pioneered the ADR concept. In 1927, it created and launched the first ADR, enabling US investors to buy shares of famous British retailer Selfridges and helping the luxury department store tap into global markets. The ADR was listed on the New York Curb Exchange.

After a few years, in 1931, the bank introduced the first sponsored ADR for British music company Electrical & Musical Industries (also known as the EMI), the eventual home of the Beatles. 

Advantages and Disadvantages of ADRs

As with any investment, there are distinct advantages and disadvantages of investing in ADRs. We've listed some of the main points below.

• Advantages

As previously stated, ADRs are like stocks. This means that they trade on an exchange or over the counter, making them relatively easy to access and trade.

Purchasing ADRs is easy because they're available directly through American brokers. And since they're available domestically, shares are denominated in US dollars, which means you avoid any direct risks associated with exchange rate fluctuations.

One of the most obvious benefits of ADRs investment is that investors may help diversify their portfolios.

• Disadvantages

The main problems associated with ADRs are double taxation, both locally and abroad.

Unlike domestic companies, there are a limited number of foreign entities whose ADRs are listed for the public to trade.

Even if investors can avoid any direct risks brought by currency exchange, they may incur fees (such as fees relating to the distribution of dividends, foreign currency exchange, voting of shares,etc.) when investing in ADRs.

(Note: Diversification is an investment strategy that can help manage risk within your portfolio, but it does not guarantee profits or protect against loss in declining markets.  Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks.)

Difference between ADR and ADS

American Depositary Receipts (ADRs) allow foreign equities to be traded on US stock exchanges. In fact, this is how the stock of most foreign companies trades in US stock markets. Meanwhile, an American Depositary Share (ADS) is the actual US dollar-denominated equity share of a foreign-based company available for purchase on an American stock exchange. 

For instance, if a US investor wanted to invest in CanCorp, the investor would need to go to their broker and purchase a number of ADRs that match the amount of CanCorp shares. In this case, the ADRs are the receipts that the investor has to purchase, whereas the ADSs represent the underlying shares (CanCorp) that were invested in.

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