FEATURED INVESTMENT: THE AMERICAN DEPOSITORY RECEIPT
Investments are what trading is all about. And knowing about the various available investment options and how to trade them is one of the keys to a successful trading career. In this tutorial, we will be tackling the most famous investments and everything you need about them.
The American Depositary Receipt (ADR) is a stock that represents a foreign company’s share that is traded in the United States. It was first offered in 1927 in the financial markets where it was bought and sold just like any other normal stock but are issued and sponsored by banks and brokerages. ADRs were made as a response for the desire of investors to trade shares with foreign countries. The varying currency and pricing made it hard for traders to successfully transact with foreign shares.
What the US banks do is to buy shares in bulk of the foreign company and then group these shares to be reissued to one of the following American exchanges: the New York Stock Exchange, the Nasdaq Composite, or the American Stock Exchange.
After grouping the shares, the depository bank sets the US ADRs per home country share ratio that may range from less than 1 and more than 1 with majority of share prices ranging from $10 to $100 each. ADRs are generally looked upon as a favorable investment because it serves as exposure for the wide US market and for US traders, take part in transacting with rich foreign equity.
How To Trade ADRs
The good thing about ADRs is that it is traded the same way you would a common stock. Most ADRs generally don’t have a minimum investment but must have at least $500 to be allowed to open an account, which is common practice with most investments.
ADRs may be used for capital appreciation, diversification, and income as its main purpose is to reduce costs by cutting down on expenses on administration and deflection transactional duties.
Advantages and Disadvantages
ADRs are advantageous to be traded because it eases the process of trading with foreign companies thus expanding capitalization potential with emerging markets. However, given the cultural barrier, the disadvantages of ADRs include higher risks: political risks (government stability of the home country), exchange rate risk (currency stability of the home country), and inflationary risk (economic stability of the home country). As the ADR is a relatively new investment in terms of usage, there are still a lot of revisions and standards to be made in financial disclosure and other financial transactions especially because of the language barrier.
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