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What is an ADR stock?

American depositary receipts are a simple way to access foreign companies’ stocks via US markets instead of trading overseas.

American depositary receipts (ADRs) are shares of foreign companies that are traded on US stock exchanges. They were specifically created to give investors access to foreign stocks without the added step of dealing in foreign stock markets. They also give foreign companies exposure, and sometimes a chance, to raise capital in the US.

How do ADRs work?

When a foreign company wants to list on a US stock exchange but avoid the hassle and fees of listing, they can enter into an agreement with a US bank or an institution known as the depository. This bank works with the foreign company and its custodian bank abroad to issue ADR shares in the US stock markets.

However, the US bank doesn’t always have to have an agreement with the foreign company. The bank—or another institution—can issue ADRs without the foreign company’s approval.

Types of ADRs

Depending on whether the foreign company and the ADR-issuing bank have agreements, there are 2 types of ADRs:

  • Sponsored ADRs are issued by a US bank on behalf of a foreign company. Typically, these 2 entities enter into a legal agreement where the foreign company pays the cost of issuing the ADR, while the US bank handles transactions with US investors. These ADRs are often registered with the SEC and are available on US exchanges.
  • Unsponsored ADRs can be issued by 1 or multiple US banks or brokers without direct involvement from the foreign company. Because multiple banks can issue unsponsored ADRs from the same company, there can be multiple ADRs from the same company, sometimes even with different dividends.

Note: Unsponsored ADRs are often traded over-the-counter (OTC) and cannot be offered to individual investors unless they file financial reports with the SEC or unless the company is 12g3-2(b)-qualified.

Definition: Depositary

Depositary is the US institution—either a bank or a broker-dealer—that works with the foreign company and their custodian bank to register and issue the ADRs on the US stock exchange. The depositary also registers the trades and distributes dividends to US shareholders.

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ADR levels explained

Based on the ADR’s access to the US stock exchanges, there are 3 categories:

  • Level I: It’s the most basic type of ADR where foreign companies are only listed on the OTC market. These are often highly speculative—similar to penny stocks—and don’t have to meet SEC requirements.
  • Level II: Mostly traded OTC, but sometimes can be traded on US stock exchanges. Unlike Level I, Level II must be registered with the SEC and must file an annual report (Form 20-F).
  • Level III: The most prestigious of all ADRs. These are typically offered on a US stock exchange and foreign companies can use Level III to raise capital via initial public offering (IPO). Because of that, Level III ADRs have to report in full to the SEC.

ADRs vs. traditional stocks

Buy ADRs on US stock exchanges the same as any other traditional stock. But here are some differences between the two.

ADRsTraditional US stocks
One ADR share can represent:
  • 1 stock of the foreign company
  • A fraction of a stock
  • Multiple stocks
1 stock is always 1 stock
You may have to pay dividend taxes from the foreign country, as well as US dividend taxes. If you fill out a W-8BEN Form, you can avoid paying US tax and pay tax in Canada instead.

If Canada has a tax treaty agreement with the foreign country, you may be able to avoid paying tax to the foreign government and pay tax in Canada instead.

You get the full dividend payment minus US taxes. If you fill out a W-8BEN Form, you can receive the full dividend and pay tax in Canada instead.
The ADR price may be influenced by currency fluctuations between the US dollar and the foreign country’s currencyNo direct currency risks
Investors may not have full access to the company’s financial information if the ADR is Level IFull company financial information available

Taxes

ADRs follow the same taxation rules as traditional stocks. This means you’ll pay taxes on any dividend payment you receive. However, the foreign home country may withhold some percentage of the dividend as tax. This can be anywhere from 15% to 35%.

Luckily, Canada has tax treaties with a number of countries, including the US, to avoid non-Canadian investments from being double taxed. For US investments, you can fill out a W-8BEN form assuring the US government that you’ll declare US investment income in Canada and pay tax to the CRA accordingly.

If Canada has a tax treaty in place with the country in which the foreign stocks have been issued, then you may be able to follow a similar arrangement to avoid being double taxed. If no such agreement is in place, you may have to pay tax to both the foreign government and the CRA.

The Department of Finance Canada has published a list of foreign countries and related tax agreements that are currently in force.

Benefits and drawbacks of ADRs

American depositary receipts are a hassle-free way to invest in foreign stocks. But there are some drawbacks to keep in mind.

BenefitsDrawbacks
Directly invest in foreign stocksNot all ADRs are listed on the major US exchanges
You don’t need to open a new brokerage accountUnsponsored ADRs don’t give you voting rights
Get dividend payments if the company pays dividendsDividends from ADRs may be double-taxed

How to buy ADRs

Buy ADRs like you would buy any other stock.

  1. Open a Canadian brokerage account if you don’t have one. Make sure the Canadian broker provides access to US stock exchanges. You can’t open a trading account with a US-based broker if you don’t reside in the US.
  2. Search for the foreign company you want to buy.
  3. Find the company ticker symbol either using Google, using a website that lists ADRs or using your broker.
  4. Enter the ADR symbol in your brokerage account.
  5. Enter the number of shares you want to buy and submit.

Note: Some ADRs trade over-the-counter (OTC). Unless your broker allows buying OTC stocks, you won’t be able to buy the ADR you want. Check with your broker to find out whether you can access stocks sold on OTC Markets.

Top 10 ADRs

We selected the 10 most popular ADRs trading on various US stock exchanges.

NameTicker symbolExchangeCountrySectorDepositaryBuy Now
VolkswagenVWAGYOTCGermanyConsumer DiscretionaryJP MorganBuy on Interactive Brokers
NokiaNOKNYSEFinlandCommunication servicesCitibankBuy on Interactive Brokers
Royal Dutch ShellRDS.ANYSENetherlandEnergyJP MorganBuy on Interactive Brokers
UnileverULNYSEUKConsumer staplesDeutsche BankBuy on Interactive Brokers
AirbusEADSYOTCFranceIndustrialsJP Morgan, BNY, Citibank, Deutsche BankBuy on Interactive Brokers
Alibaba GroupBABANYSEChinaConsumer staplesCitibankBuy on Interactive Brokers
Nio IncNIONYSEChinaConsumer discretionaryDeutsche BankBuy on Interactive Brokers
Sony CorpSONYNYSEJapanInformation technologyCitibankBuy on Interactive Brokers
BioNTech SEBNTXNASDAQGermanyHealthcareBNYBuy on Interactive Brokers
Nintendo Co LtdNTDOYOTCJapanInformation technologyJP Morgan, BNY, Citibank, Deutsche BankBuy on Interactive Brokers

Alternatives to ADRs

The only alternative to buying an ADR is to open an account with a broker that offers access to foreign stocks, such as Interactive Brokers. However, this often comes with additional fees and conversion rate fluctuations.

If the stock you want to buy has an ADR, it’s often cheaper to buy it in that form. Otherwise, brokers that offer access to foreign markets can offer a higher variety of foreign stocks that may not have an ADR.

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Bottom line

ADRs are an excellent option for investors looking to buy foreign stocks without the complexity of accessing foreign markets. Buy ADRs like you would buy any other stock on a Canadian or US stock exchange.

But be aware of the pros and cons before you invest. Compare your options to find a stock trading platform that provides access to the US stock exchanges on which you want to trade along with a fee structure that works for you.

Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.

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