American Depository Receipt (ADR)
Updated on October 4, 2023
An American Depository Receipt (ADR) is a financial instrument that represents shares of a foreign company traded on a U.S. stock exchange. It is designed to make it easier for investors in the United States to buy, hold, and trade shares of foreign companies without having to directly invest in the foreign company’s home stock exchange. ADRs are issued by U.S. banks or financial institutions and are essentially certificates that represent ownership in a specific number of shares of the foreign company’s stock.
What are the benefits of investing in ADRs?
ADRs can be relevant to individuals in India who want to invest in foreign companies, especially those listed on U.S. stock exchanges. ADRs provide exposure to international markets, allowing Indian investors to diversify their portfolios beyond Indian companies. ADRs are traded in U.S. markets during U.S. trading hours, making it more convenient for Indian investors to access global markets. They are priced in U.S. dollars, reducing the currency risk associated with investing directly in foreign stocks. Many ADRs of large, well-known foreign companies are highly liquid, making it easier to buy and sell shares.
What are the limitations of investing in ADRs?
ADRs may have tax implications in both India and the United States, so it’s crucial to understand the tax treatment of any gains or dividends. While ADRs reduce currency risk compared to investing directly in foreign stocks, currency fluctuations can still impact returns. Investors should conduct thorough research on the foreign companies they are interested in and be aware of any geopolitical or economic factors that could affect their investments.