When investing in foreign securities, an investor has a few options. Probably the easiest is investing in mutual funds that purchase foreign stocks. Another option would be to purchase shares of stock on a foreign exchange. However, transactions have to be denominated in the foreign exchange's home currency, and you or your broker must have access to the particular foreign exchange.
There are foreign companies that list their stock on US exchanges, but the number is small due to the costs and regulations in doing so. For instance the New York Stock Exchange allows non-US companies to be listed on the exchange if that company complies with all the exchangeâ€™s rules and regulations and those of the US Securities and Exchange Commission (SEC). Foreign companies desiring to be listed incur a dual listing fee and have to generate reports in English for traders and investors.
American Depository Receipts
One way for an investor to bypass obstacles when investing in foreign securities is by purchasing what are commonly known as American Depository Receipts (ADRs).
ADRs are shares of stock in a company domiciled outside the United States on deposit with a US bank, that acts as custodian for those shares on deposit and, in turn, issues certificates representing those shares to US investors. In many cases those ADRs represent several foreign shares or partial shares in order to prevent unusual share prices due to the foreign exchange rates. The end goal is to package and price the ADR at a level similar to that of a US stock. All ADRs are denominated in US dollars and all dividends paid are denominated in US dollars. Upon sale of the ADR it is either sold to another US investor or it is canceled and the shares are sold to a non-US investor.
ADRs listed on US exchanges provide the shareholders with the same level of information that is provided to any holder of a US security. For instance, trading information is available along with the companyâ€™s financial reports conforming to US accounting standards and information required by the SEC that regulates the companyâ€™s disclosure of information to investors with annual company reports and ancillary materials provided in English.
If the ADR is traded over the counter (OTC), then the information is going to be more limited where accounting and SEC regulations are concerned as the SEC does not require companies to communicate with shareholders on a regular basis.
Purchasing and Trading
ADRs are purchased via a broker. Some ADRs offer direct purchase plans as well as dividend reinvestment programs. When selling an ADR, it trades just like any other US security and can be sold to another US investor.
From a tax perspective, the dividends paid on ADRs are taxable just like the dividends on US shares. Additionally, foreign taxes may be withheld by the ADR's local government and may be applied as a credit against US taxes. Itâ€™s best to consult your tax advisor where tax issues are concerned.
Investing in ADRs, like any other investment, is not without risk. For instance, currency fluctuations can impact the value of the ADR as well as foreign market and geopolitical risk.
Some of the largest US banks offer ADRs and direct purchase and dividend reinvestment programs for ADRs. These institutions include the Bank of New York, Citibank, and J.P. Morgan. Thomas R. Kosky and his partner, Harris L. Kerker, are principals of the Asset Planning Group, Inc, in Miami, Florida. The company specializes in investment, retirement, and estate planning. Mr. Kosky also teaches corporate finance in the Saturday Executive and Health Care Executive MBA Programs at the University of Miami in Coral Gables, Florida. Mr. Kosky and Mr. Kerker welcome questions or comments at 800-953-5508, or e-mail Mr. Kosky directly at ProfessorKosky@aol.com.