American depositary receipts (ADRs) are shares of foreign companies that are traded on US stock exchanges. They were specifically created to give US 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 two types of ADRs:
Sponsored ADRs are issued by a US bank on behalf of a foreign company. Typically, these two 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 one 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.
ADR levels explained
Based on the ADR’s access to the US stock exchanges, there are three 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.
ADRs
Traditional US stocks
One ADR share can represent:
One share of the foreign company
A fraction of a share
Multiple shares
One share is always one share
You may have to pay dividend taxes from the foreign country, as well as US dividend taxes
You get the full dividend payment minus US taxes on the dividend
The ADR price may be influenced by currency fluctuations between the US dollar and the foreign country’s currency
No direct currency risks
Investors may not have full access to the company’s financial information if the ADR is Level I
Full 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, the IRS offers tax credits, so your dividend doesn’t get double-taxed. To get the tax credit, you’ll need to fill out Form 1116. This will help you offset the amount you already paid to the foreign country. However, if the foreign country tax is higher than the one in the US, you can only get a tax credit for the amount taxed by the IRS. For example, you pay 15% tax in the US but 35% in the foreign country. The IRS can only give you credit for the 15%, thus the foreign country keeps the remaining 20% Important: You can’t get tax credits for ADRs held in tax-deferred accounts, such as IRAs.
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.
Benefits
Drawbacks
Directly invest in foreign stocks
Not all ADRs are listed on the major US exchanges
You don’t need to open a new brokerage account
Unsponsored ADRs don’t give you voting rights
Get dividend payments if the company pays dividends
Dividends from ADRs may be double-taxed
How to buy ADRs
Buy ADRs like you would buy any other stock.
Open a brokerage account if you don’t have one.
Search for the foreign company you want to buy.
Find the company ticker symbol either using Google, using a website that lists ADRs or using your broker.
Enter the ADR symbol in your brokerage account.
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.
Top 10 ADRs
We selected the 10 most popular ADRs trading on various US stock exchanges.
Name
Ticker symbol
Exchange
Country
Sector
Depositary
Volkswagen
VWAGY
OTC
Germany
Consumer Discretionary
JP Morgan
Nokia
NOK
NYSE
Finland
Communication services
Citibank
Royal Dutch Shell
RDS.A
NYSE
Netherland
Energy
JP Morgan
Unilever
UL
NYSE
UK
Consumer staples
Deutsche Bank
Airbus
EADSY
OTC
France
Industrials
JP Morgan, BNY, Citibank, Deutsche Bank
Alibaba Group
BABA
NYSE
China
Consumer staples
Citibank
Nio Inc
NIO
NYSE
China
Consumer discretionary
Deutsche Bank
Sony Corp
SONY
NYSE
Japan
Information technology
Citibank
BioNTech SE
BNTX
NASDAQ
Germany
Healthcare
BNY
Nintendo Co Ltd
NTDOY
OTC
Japan
Information technology
JP Morgan, BNY, Citibank, Deutsche Bank
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 the US market. But be aware of the pros and cons before you invest. And compare your options to find the right broker when looking to invest in ADRs.
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Finder is not an advisor or brokerage service. Information on this page is for educational purposes only and not a recommendation to invest with any one company, trade specific stocks or fund specific investments. All editorial opinions are our own.
Kliment Dukovski was a personal finance writer at Finder, specializing in investments and cryptocurrency. He's written more than 700 articles to help readers compare the best trading platforms, understand complex investment terms and find the best credit cards for their needs. His expert commentary has been featured in such digital publications as Fox Business, MSN Money and MediaFeed. He’s also well-versed in money transfers, home loans and more — breaking down these topics into simple concepts anyone can understand. In another life, Kliment ghostwrote guides and articles on foreign exchange, stock market trading and cryptocurrencies. See full bio
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