If you want to buy stock in a foreign company, one of the most useful tools you have is an ADR. An ADR is an American Depository Receipt. If you have ever bought shares of a foreign company through your brokerage, you most likely purchased an ADR.
ADRs were invented to allow US investors to access foreign stocks easily and thus give foreign companies better access to the US capital markets. The first ADR was arranged by JP Morgan in 1927. Today, JP Morgan, Citibank, Deutche Bank, and Bank of New York Mellon control the vast majority of all ADR activity.
This is a win-win situation for both companies and investors. However, there are a few important issues to be aware of when buying an ADR.
Not Actual Shares
When you buy an ADR, you are not directly purchasing shares in a company. Instead, you are buying a receipt that represents shares held by a bank. For example, if you buy ADR shares of Teva Pharmaceutical Industries on the NASDAQ, you are actually buying an ADS (American Depository Share) representing one share of Teva stock listed on the Tel Aviv Stock Exchange held by a bank on your behalf.
The bank that holds the ADR can charge shareholders a fee for servicing the ADR. Those fees can be taken from your dividend payment or your brokerage account balance. See your stock brokerage policy for how these fees are handled.
Companies Do Not Follow US Laws
If a company does business in the US and is listed on US markets, it has to follow certain government regulations. All ADR companies must follow Sarbanes Oxley Act transparency requirements. However, they do not file a 10k annually (they file a form 20-F). They are also subject to the foreign laws of their home countries. If you buy an ADR for a company located in Russia, that company follows Russian law. Some foreign companies have been nationalized by the government (aka stolen from owners). Nationalization risk is real is some parts of the world. Know where your companies are located and understand the risks of investing abroad.
Currency Concerns and Arbitrage
An ADR from Japan is traded on both the US stock exchange (NYSE or NASDAQ) and the Tokyo Stock Exchange. The stock is trading in both dollars and Yen. Because the stocks generally hold to the same valuation in both markets, the share price in the US may fluctuate with the dollar/yen exchange rate. This allows for both arbitrage opportunities (buy/sell/short sell between the two exchanges) and currency risk.
Are ADRs Good?
ADRs are a great resource for US based investors. You can cheaply buy and sell foreign stock through your stock broker without paying huge foreign stock exchange trade fees. However, it is important to understand the fees and risks associated with buying a foreign company. I have looked into buying Teva and other ADRs. I have not made the buy yet, but I am always on the lookout for a good stock no matter where the headquarters is located.