While diving deep into the world of stocks, you must have heard of ADR stocks. These stock options are new and enticing for investors. On top of that, people who want to diversify their portfolio look for new industries and stock options. People have questions like, what is an ADR stock? And how does ADR stock work?
Therefore, in this article, we will learn about ADR stocks. Other than that, we will analyze its advantages and disadvantages. It is significant to have a general understanding of different stock options as an investor. So, even if you don't want to invest in ADR stocks, continue reading for a general understanding.
What is an ADR stock, and How Does it Work?
ADR stands for American Depositary Receipt. The ADR stocks are stocks from international stock markets. Moreover, these are the foreign companies that you can buy stocks of. It can be incredibly profitable to invest in emerging markets. On top of that, investors in the past have already made millions in emerging markets. The best part about ADR stocks is that you don't have to invest or trade in foreign markets.
You can buy ADR stocks in the USA. Besides that, this gives an exposure to foreign markets as well. Developed markets like the USA's Nasdaq or the New York Stock Exchange are costly and competitive to invest in. On the contrary, when you invest in emerging markets, you have higher chances of unimaginable profits.
Other than that, emerging foreign markets can be volatile and risky. That is why doing your homework before you trade these stock options is recommended. Now, let's get into the nitty-gritty of ADR stocks and how they work!
As said earlier, ADR stocks are companies outside the USA that want to list themselves in the U.S. market. They can't be listed in the American markets like that. So what happens is that the Depositary Bank in the USA buys the company's shares. Moreover, this is the same bank that provides the facility to purchase ADRs, hence the name American Depositary Receipt.
Besides all that, you can buy these stocks just like any standard stock from the stock market. There is no issue in holding the shares. On top of that, you also get the dividends of the company.
Another thing that bugs a lot of people is currency. Most people assume you must buy these shares in the company's local currency. Furthermore, people think the dividends are also received in the local currency. To clear that out, everything is done in the U.S. dollar to facilitate the investors.
Besides that, when it comes to ADR stock fee, one common question is, "Are ADR fees tax deductible?". So the answer is yes, there might be scenarios where you have to pay taxes on that. Moreover, it depends on the law and regulation. So you should check that out.
Advantages of Having ADR Stocks
For people considering ADRs, there are a lot of things to consider. Here are a few significant advantages of ADR stocks.
1. ADRs are Easy and Convenient
The first advantage that ADR stocks have is convenience. By that, I mean the convenience of buying and selling foreign company shares in the USA. Because if you go the other route, you'll have to consider many things before investing. In ADRs, everything is figured out. For instance, you get to buy shares and get dividends in U.S. dollars.
For people invested in the U.S. market, it is a headache to have foreign shares. That is because of the lengthy procedures and all the hectic research that leads to it. But when it comes to ADR stocks, everything is figured out by the Depositary Bank. You can freely buy and sell stocks that they have.
One thing that you need to remember is to do proper research. Moreover, having options to invest in foreign markets doesn't necessarily mean that you will make profits. Therefore, you need to have the know-how of the foreign market you are invested in.
2. Better Liquidity Than Others
Better liquidity means less risk. That is why stocks with better liquidity are good to have in your portfolio. Furthermore, most stocks have lower liquidity when we talk about foreign stocks and emerging markets. That is because they are risky stocks and have a smaller market As Compared To the regular stock market.
Therefore, having stocks that have good liquidity is significant. The ADR stocks have better liquidity than other foreign stocks. This is an excellent advantage that changes everything for many people. So, when you decide on ADR stocks, remember they have better liquidity.
3. Great for Diversifying Portfolio
For people invested in the local stock market, it is essential to explore more. On top of that, diversification is fundamental. It not only helps lower risk but also expands the portfolio. Moreover, exploring the global market can be an excellent idea for diversification. Therefore, people invest in ADRs to have a greater portfolio including international markets.
Disadvantages of Having ADR Stock
Now, let's talk about some of the demerits of having ADR stocks.
1. Weaker Voting Rights
As an ADR shareholder, you get the dividends but don't get complete voting rights. Moreover, your voting rights as an investor are limited. If that is something that bugs you, then remember you get limited voting rights in ADR stocks.
2. Hard to Research Foreign Companies
Another disadvantage is that foreign companies have fewer data available in the U.S. Furthermore, it might be a headache to research companies. So, do consider researching before you invest your money in any company.
In Conclusion
ADR or American Depositary Receipts are stock options of foreign company shares. You can buy, hold and sell foreign shares and also earn dividends. We have discussed what is an ADR stock and how does it works in detail. On top of that, we have also mentioned some advantages and disadvantages of ADR stocks.
