What is an ADR anyway?

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ADR stands for "American Depository Receipt," and it's a way of making hard-to-trade foreign stocks available to investors in the United States. Buying and selling ADRs lets you participate in foreign markets without having to deal with unfamiliar currencies, foreign taxes, and inconvenient per-share prices.

Image courtesy Perpetual Tourist: http://www.flickr.com/photos/petrick/ An ADR is created when a American bank buys a large batch of shares from a foreign company, then bundles the shares and sells them on a U.S. stock exchange. American traders buy and sell the shares just like they would any other stock. If you own an ADR, you get the usual benefits of an ordinary share, including voting rights and cash dividends.

One thing that's different is that an 1 ADR share doesn't necessarily represent 1 share of the foreign company. Banks often put several shares of the original stock together to create 1 ADR share that sells for a convenient price in the American market. A $20 share of an ADR may represent 10 shares of the original stock, which are normally worth about $2 each.

(Once they are created, ADR shares trade separately from the original shares, and often have slightly different values than the originals. However, ADR share values usually track with the original share values.)

ADR shares come in three different levels. Level 1 ADRs are found on the over-the-counter market, and have the fewest reporting requirements. Level 2 ADRs have more requirements from the SEC, but are listed on exchanges or quoted on NASDAQ. Level 3 ADRs have the most requirements, but are the most secure and can be sold via a public offering on U.S. exchanges.

Like any other foreign stock, ADR stocks require careful research and consideration -- but at least you can buy them without making a trip to Bombay!

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks

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