Investing in Overseas Companies by way of “ADRs”

Strong growth has been experienced by advanced, as well as developing, overseas economies in recent years. International diversification provides investors with the opportunity to take part in this global growth and is an important part of investment portfolio strategy. One way to invest in a mix of non-U.S. international stocks at low cost is to buy exchange-traded-funds, such as the S&P Europe 350 iShares, that trade on the U.S. markets. But if you wish to purchase an individual company, a cost effective way is to purchase an American Depositary Receipt (ADR), that also trades in the U.S. markets. The Bank of New York Mellon is the world’s largest depository for ADRs.

Each ADR represents one or more shares of a foreign stock, or a fraction of a share. The price of an ADR corresponds to the price of the foreign stock in its home market, adjusted to the ratio of the ADRs to the foreign company shares. If you own an ADR, you have the right to obtain the foreign stock it represents, but investors usually find it more convenient to simply own the ADR. The benefits to investors include the reduction of transaction costs and currency conversion costs, eliminating settlement delays and other potential inconveniences associated with international securities trading.

ADRs are treated in the same manner as other U.S. securities for clearance, settlement, transfer, and ownership purposes. The continuous buying and selling of ADRs, along with competitive U.S. dollar/foreign exchange rate conversions, keeps the price differential of stocks between the local and U.S. markets to a minimum. Dividends and other cash distributions are converted to U.S. dollars.

Currently, there are over 2,250 Depositary Receipt programs for companies from over 70 countries. Through the issuance of an ADR, a foreign company has access to expanded market share through broadened and more diversified investor exposure, which can provide it with greater liquidity. It also affords enhanced visibility and image for the company’s products, services and financial instruments in a marketplace outside its home country. Here are some examples of companies that have ADRs that trade on the New York Stock Exchange: ‘Barclay’s Bank’ (United Kingdom), ‘Volvo’ (Sweden), ‘Novartis’ (Switzerland) and ‘Siemens’ (Germany).

Article posted: December, 2007