Investing Portfolio Management International Investing What Are American Depositary Receipts? Definition & Examples of ADRs By John Christy John Christy John Christy has spent decades covering international markets and investing. He served as a business journalist, analyst, and editor with Forbes and Bloomberg, and contributed expert content on international investing for The Balance. He's currently an investment counsellor in Canada. learn about our editorial policies Updated on March 4, 2021 Reviewed by Julius Mansa Reviewed by Julius Mansa Julius Mansa is a CFO consultant, finance and accounting professor, investor, and U.S. Department of State Fulbright research awardee in the field of financial technology. He educates business students on topics in accounting and corporate finance. Outside of academia, Julius is a CFO consultant and financial business partner for companies that need strategic and senior-level advisory services that help grow their companies and become more profitable. learn about our financial review board In This Article View All In This Article What Are American Depositary Receipts? How ADRs Work Advantages and Disadvantages of ADRs Tax Considerations When to Use ADRs Photo: Tetra Images / Getty Images Definition An American depository receipt (ADR) is a security that represents indirect ownership of shares of a foreign company that isn't directly traded on U.S. exchanges. American banks purchase the shares through their foreign branches and make them available to investors in the U.S. What Are American Depositary Receipts? Not all foreign companies trade directly on U.S. exchanges. But with American depositary receipts, investors can still own shares of many of these companies. Banks and other financial institutions can purchase shares of foreign companies through their foreign branches. Then, they sell ADRs in the U.S. as a form of indirect ownership. These ADRs entitle the purchaser to the foreign stock they represent, even though the bank still has title to the underlying stock. The first ADR was created in 1927 by J.P. Morgan. This was to allow Americans to invest in shares of a British department store. Today, there are more than 2,000 ADRs available, representing shares of companies located in more than 70 countries. The Bank of New York, JPMorgan Chase, Deutsche Bank, and Citigroup are among the leading depositary banks, which create and issue ADRs. The popularity of ADRs has surged over the years. They have a number of distinct advantages that appeal to both small investors and professional money managers alike. Note A single ADR may represent one share of a foreign company, or it may be a fraction of a share. It depends on the company and the foreign exchange rate involved. This enables firms to convert prices to amounts more appropriate for American exchanges. How ADRs Work Let's say you're interested in investing in France. One option is to open a brokerage account in Paris, wire some money over there, convert your dollars into euros, and then go shopping for French stocks. This would be a difficult and time-consuming process. Also, your accountant would not be very happy with you at tax time. ADRs can eliminate these hassles. You won't have to deal with currency conversions and opening foreign accounts. Instead, you can buy ADRs of French companies that banks and brokers make available on the American exchanges or over the counter. Advantages and Disadvantages of ADRs What We Like Easy to use Available through your U.S. broker USD-based pricing Trade on U.S. market hours What We Don't Like Limited selection of securities Poor liquidity Exchange rate fluctuations Difficult to diversify Higher fees Advantages Explained American Depositary Receipts have a number of benefits that make them an ideal opportunity for international investing, including: Ease of use: ADRs can be bought and sold just like shares of IBM or Google.Same broker: You don't need a foreign brokerage account or a new broker; you can use the same broker that you normally deal with.Dollar-based pricing: Prices for ADRs are quoted in U.S. dollars. And dividends are paid in dollars.Standard market hours: ADRs trade during U.S. market hours; they are subject to similar clearing and settlement procedures as American stocks. Disadvantages Explained By the same token, ADRs have some important limitations and drawbacks. These include: Limited selection: Not all foreign companies are available as ADRs.Liquidity: Plenty of companies have ADR programs available, but some may be very thinly traded.Exchange rate risk: While ADRs are priced in dollars, for sake of convenience, your investment is still exposed to fluctuations in the value of foreign currencies.ADRs are like stocks: You need to buy enough of them to have enough diversification. So if you don't have enough investment capital to spread around, say 25 to 30 ADRs (or more), you won't be able to create a truly diversified portfolio on your own.Higher fees: ADRs can carry higher fees than traditional stocks. Important There are three levels of ADR programs: Level 1 ADRs, available over the counter, are the most risky. Level 2 and 3 ADRs are progressively less risky. That's because the Securities and Exchange Commission puts stricter reporting requirements on them. Tax Considerations ADRs have a number of unique differences relative to foreign stocks or traditional U.S. stocks that are equally important to consider. For instance, there is a significant difference in the way that taxes are charged on dividends. As with U.S. stocks, dividends are taxable in the U.S. Unlike U.S. stocks, the dividends may also be subject to tax by the company's home country. However, they're usually automatically withheld by the sponsor. Investors may choose to apply a credit to their U.S. taxes or apply for a refund abroad to avoid double taxation. Before investing in ADRs, you may want to consult with a financial advisor and a tax advisor to understand the implications for your portfolio. When to Use ADRs Once you have a bit of international investing experience under your belt, ADRs can be a powerful tool to customize your portfolio or make targeted investments in specific companies, sectors, and countries. The flexibility may be especially appealing to value investors looking to expand their reach into international markets rather than only being able to access domestic stocks. If you are just getting started in international investing, though, it's much easier to stick with a good international mutual fund or ETF until you have a firm grasp of the basics. Key Takeaways American depositary receipts (ADRs) represent indirect shares in foreign companies.U.S. financial institutions purchase shares through their foreign branches and make them available to American investors.ADRs offer a simple way for many investors to purchase foreign stock without dealing with foreign banks and exchange rates.However, they are typically more expensive and challenging than investing in international funds. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. United States Office of Government Ethics. "American Depositary Receipt." Accessed Aug. 19, 2020. U.S. Securities and Exchange Commission. "Investor Bulletin: American Depositary Receipts." Accessed Aug. 19, 2020. Nasdaq. "What Is an ADR, and How Is It Different From a Regular Stock?" Accessed Aug. 19, 2020.