American Depositary Receipts (ADRs)
ADRs are securities listed on U.S. exchanges that represent ownership of shares in foreign companies. For companies based outside of the U.S., listing shares directly on American exchanges like the NYSE or Nasdaq is a complicated and expensive process. However, American investors may want to purchase shares of these companies to diversify their portfolios and gain exposure to new markets. ADRs make it easy for American investors to do this.
To offer ADRs to investors, American banks first purchase shares of foreign companies on foreign exchange(s). Then, the banks issue the ADRs, which are certificates denominated in American dollars that represent the foreign shares and can be traded on an American stock exchange.
An ADR may represent a single foreign share, a fraction of a share, or a bundle of shares depending on the price the bank wants to list the ADR for. Many banks will divide or group foreign shares so the ADR price aligns more closely with typical prices on American stock exchanges. Holding an ADR is similar to owning a share in the foreign company, so ADRs still may pay dividends and are subject to capital gains taxation in American dollars.
Robinhood offers certain ADRs for trading on our platform, but not all.
Some banks require investors who hold ADRs to pay periodic services fees (sometimes called “custody fees”), which typically run between $0.01 to $0.03 per share. If you purchase a share from a company that’s based outside the U.S. on Robinhood, you can find information about any ADR fees that may apply on the website of the bank issuing the ADR.
Just like all other securities, there are certain benefits and risks associated with ADRs.
• Increased diversification: ADRs can help American investors build a more geographically diverse portfolio.
• Lower cost: Investing directly in foreign markets can be expensive, so ADRs generally help to lower that barrier to entry.
• Exchange rate fluctuations: If the currency in the issuing company’s country drops relative to the U.S. dollar, that can bring down the value of your investment.
• Political upheaval: Regime changes in the issuing company’s country can negatively impact the exchange rate or destabilize the company in some other way, and American investors often do not have as much context on how these factors can affect their investment.
• Inflation risk: If the issuing company’s country is experiencing rising inflation, that can lower the value of their currency.
• Access to different information: Not all foreign companies provide shareholders with the same type of information that American companies do, and language barriers can make it difficult to access the information that is available.
Occasionally, the American bank responsible for custodying the shares will terminate the ADR while the underlying foreign stock is still active. There are three ways that this is generally handled:
Scenario 1: Shareholders automatically receive cash for their ADR shares.
Scenario 2: Shareholders have a six-month window where they can voluntarily convert their ADR shares into the underlying foreign shares. After that six-month window, the foreign shares are automatically sold and holders receive cash.
Scenario 3: The ADR shares are automatically converted into the underlying foreign shares. Because Robinhood cannot support the underlying foreign shares, customers will need to work with the company’s transfer agent to receive physical stock certificates.
The decision to terminate an ADR isn’t made by Robinhood. If you have questions about why an ADR was terminated, we suggest contacting the holding bank’s investor relations team to learn more.
Diversification does not ensure a profit and cannot protect against losses in a declining market All investments involve risk and loss of principal is possible.
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