How to Buy ADR Stocks

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Contributor, Benzinga
February 22, 2022

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Originally introduced in 1927, American Depositary Receipts (ADRs) allow Americans to purchase stocks that trade in the U.S. but represent a specified number of shares in a foreign corporation. The first ADR allowed U.S. investors to purchase shares of a British department store. Here's how you can buy them

What's an ADR stock?

Today’s market includes a variety of ADRs across all markets. These include popular companies such as Alibaba, Bidu, Vale SA, Teva Pharmaceuticals, Gazprom and more.

Banks issue ADR stock for companies traded on foreign exchanges, in which one share of an ADR represents one, multiple or fractions of shares of the original stock. U.S. investors can purchase ADR stock on the major U.S. exchanges.

ADRs come in two types, sponsored and unsponsored. Sponsored ADRs have an agreement between the foreign company and the U.S. bank who performs recordkeeping. Non-sponsored ADRs do not have an agreement and originate from a U.S. broker-dealer. However, non-sponsored ADRs may not be established if the foreign company is not subject to the SEC reporting requirements or has an exemption.

You can read more about ADRs on the SEC website.

Where Can I Buy ADRs?

ADR stocks trade on American exchanges including the NYSE, AMEX, Nasdaq, and the over-the-counter markets.

Investors group ADRs into three levels:

  • Level 1: Unsponsored, over-the-counter ADR that isn’t permitted to raise capital but which creates a trading presence. An F-6 form is filed with the SEC to establish the ADR.
  • Level 2: ADR allows trading on the national exchanges, but cannot be used to raise capital. The company will register and file annual reports with the SEC.
  • Level 3: Highest classification that establishes trading on national exchanges and allows for capital raising. Foreign companies both register and file annual reports with the SEC.

Check out Benzinga’s article on how to buy stocks on the OTC market.

Similarities and Differences Between ADRs and Regular Stocks

ADRs and regular stocks share many common characteristics.

  • Both trade through regular business hours on the American stock exchanges.
  • Ownership of ADRs or regular stocks entitles shareholders to dividend payouts.
  • Prices trade in U.S. dollars.

ADRs contain some significant differences compared to regular stocks:

  • ADR companies maintain headquarters in foreign countries.
  • Banks convert payouts to shareholders from foreign currency.
  • Depending on the level, ADRs may not be permitted to trade on the national exchanges or may not file regular reports.
  • Banks that hold ADRs may charge additional fees.

How to Buy ADR stock

If you’ve researched a foreign company and decided you’d rather purchase its ADR than shares directly on the foreign exchange, you can follow these steps:

  1. Decide how much you want to invest.

    Determine the total number of shares or dollars you wish to allocate towards purchasing the ADR stock. In order to calculate the number of shares you want to purchase,  divide the total amount you want to invest by the current or closing price of the ADR.

  2. Pick a broker

    Since ADRs trade like regular stocks, you’ll be able to use any broker that trades stocks. Review brokers based on transaction costs as well as research they provide to help guide your decisions.

  3. Purchase shares of the ADR

    Once you’re ready, you can purchase shares of the ADR like regular stock. The closing price of a foreign company will be translated into U.S. dollars for the opening price on the American exchanges.

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Final Thoughts on ADRs

It’s easy to equate an ADR to trading regular stock. Investors often create trading plans with stop orders. However, they forget that an ADR’s main stock trades in a foreign exchange overnight.

This can lead to overnight large price changes that trigger stop orders first thing at the open. Any strategy you implement to trade ADRs needs to consider these impacts. Consider using adjusting plans to enter or exit positions into an ADR based on closing prices.

Frequently Asked Questions

Q

Where are ADRs traded?

A

ADRs trade in the OTC markets or on a stock exchange.

Q

What are the risks of investing in ADRs?

A

The risks include currency, market and business.