Wait! Before You Buy THIS Type of Stock…
I gave you a brief intro to ADRs in yesterday’s issue.
It’s important to fully understand what they are and how they work before deciding whether or not you want to invest your time (and money) in them.
Let’s take a closer look today at ADRs and what you should consider if you decide to actually buy ADR stock.
The Importance of American Depositary Receipts
Why do ADRs matter? Let’s look at it from the point of view of the company, and that of the investor.
For foreign companies, ADRs allow them the opportunity to offer shares on U.S. exchanges, in U.S. dollars. This means that they get greater international exposure and can attract a wider and more global investment base.
For investors, the ADR allows them to diversify their portfolio by buying into foreign companies.
However, they don’t have to deal with the many issues that will come up when trading overseas, such as dealing with foreign banks, delayed information, information printed in languages they may not understand, and perhaps most importantly, baking fees and currency conversions.
How ADS and ADR Relate to Common Stock
ADS and ADR are kind of like the google translate version of common stock. They share a lot of similarities, but there are a few little quirks.
ADRs and ADSs have a few differences that are important in differentiating them from common stock.
For one, there’s a big difference in how taxes are charged on dividends. With a common stock, the dividends are U.S. taxable.
With your ADR, the dividends can be taxed by the home country of the company issuing the original stock. These amounts will usually be withheld by the sponsor. however, it is a difference worth noting.
Some investors will apply for a refund abroad so that they aren’t taxed twice. This is important to consider before you invest in ADRs.
Curious about how to trade ADRs? Here are some of the basics so you can get started.
How To Buy ADR Stock
If you want to buy ADR stock, it’s really as easy as hitting up the stock market and placing an order. But how do you know if a listing is an ADR or a common stock?
How is the price of ADRs determined? With the ADR ratio.
Sometimes, an ADR might be a 1-to-1 ratio with the foreign shares translating to U.S. shares, but this isn’t always the case.
For example, one ADR could be 2 or more shares. This is done so that the prices can remain competitive with share in the U.S. market.
This refers to the number of foreign shares equal to one ADR. Often, you’ll see it listed as a ratio, such as 2:1 would mean that 2 foreign shares equals a single ADR.
Supply and Demand
When the ADR is released on the market, like a stock, the price it commands is based on supply and demand.
While ADRs are affected by the trend of the shares in the home country, there can be exceptions. If the U.S. price varies considerably, opportunities for arbitrage trading may exist.
According to Investopedia, “Arbitrage is the simultaneous purchase and sale of an asset to profit from an imbalance in the price. It is a trade that profits by exploiting the price differences of identical or similar financial instruments on different markets or in different forms. Arbitrage exists as a result of market inefficiencies and would therefore not exist if all markets were perfectly efficient.”
How Can You Easily Profit from ADR Trading?
There are a few different reasons why investors find ADR trading alluring.
First, it can make profiting from foreign investments easier.
Since ADRs trade on the U.S. stock exchanges, you don’t have to deal with the hassles that come with crossing borders, and this means fewer fees and fewer logistical issues.
Interestingly, one of the key ways that you can profit from ADR trading is by betting against U.S. currency.
That is to say, if you invest in a company that is doing well overseas, you’re investing in that company and that country’s national currency has an effect.
So, if the dollar falls in value versus the home country of ADRs, the ADR can go up in share price, which can net you profits.
I hope that helps clarify ADRs a bit more.
You might be ready to jump on the ADR bandwagon now… but just hang tight.
Tomorrow I want to go over some of the risks with investing in these. Because just like everything in the investing world, there’s always some amount of risk.
Catch you tomorrow.
— Tim Sykes
Editor, Penny Stock Millionaires