Essential Guide for Beginners Investing in American Depositary Receipts: Pros and Cons

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By investing in American Depositary Receipts, you can easily purchase shares of well-known foreign companies like TSMC, enjoying dollar-denominated pricing and the liquidity of the U.S. market. However, exchange rate fluctuations and custody fees can also affect returns. Recently, the ARK Innovation ETF bought over 120,000 shares of TSMC ADR in a single day, reflecting significant capital flows in the real-time market for American Depositary Receipts, with AI-related stocks being particularly active. These changes make it easier for you to seize global investment opportunities, but you must also be mindful of price volatility.

Key Points

• American Depositary Receipts (ADRs) allow you to invest in well-known foreign companies using U.S. dollars without needing to open an overseas account, making transactions convenient and fast.
• Investing in ADRs can diversify risks across different countries and industries, enhancing asset stability, but you should be aware of the impact of exchange rate fluctuations and price premiums or discounts.
• Choosing high-liquidity popular ADRs can reduce bid-ask spreads and trading difficulties, avoiding increased costs due to insufficient liquidity.
• Holding ADRs requires paying custody fees, which can accumulate over long-term investments and affect actual returns; you should understand these fees before investing.
• When investing in ADRs, establish trading discipline, utilize real-time information, and adopt a staggered buying strategy to manage risks and improve investment success rates.

What Are American Depositary Receipts

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Basic Concept

Want to invest in foreign companies but don’t want to open an overseas account? American Depositary Receipts (ADRs) can help you. U.S. banks “package” foreign company stocks into ADRs, allowing you to buy and sell them directly in the U.S. market using dollars. You can think of an ADR as a “stock gift box” containing shares of a foreign company. This method not only lets you invest in globally renowned companies using dollars but also allows you to enjoy the liquidity of the U.S. market. According to professional analysis, the main differences between ADRs and ordinary stocks lie in currency, issuing entity, and pricing. ADRs make it easier for companies to raise capital and increase visibility, while investors benefit from transparency and risk diversification. However, you should also be mindful of risks such as exchange rate fluctuations, liquidity, and fees.

How They Work

When you buy an ADR, a U.S. depositary bank (e.g., a U.S. branch of a Hong Kong bank) holds the foreign company’s stock and issues the ADR to you. ADRs come in different levels, each with varying liquidity and regulatory requirements. You can refer to the following points to understand how ADRs work:

• Research shows that ADR prices not only reflect the value of the underlying stock but are also influenced by U.S. market sentiment.
• Today’s ADR premium or discount often predicts the performance of the underlying stock tomorrow.
• After an ADR is listed, information flows faster, and stock prices align more closely with their true value.
• When investing, besides looking at company fundamentals, you should also pay attention to market sentiment.

These characteristics make ADRs an important tool for international investing, especially for those looking to diversify their portfolios.

Real-Time Information on American Depositary Receipts

When investing, your primary concern is the real-time price changes of American Depositary Receipts. Take TSMC as an example: according to the latest market data, TSMC’s ADR has risen for nine consecutive days, with a premium as high as 21.7%. This real-time data on American Depositary Receipts allows you to stay updated on market dynamics and make informed investment decisions. You can refer to the table below to understand the current prices and premiums of different ADRs:

Tip: You can use real-time information on American Depositary Receipts to monitor price fluctuations, identify arbitrage opportunities, or diversify risks.

Main Advantages of ADRs

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Trading Convenience

By investing in ADRs, you can directly buy and sell foreign company stocks on U.S. exchanges. You don’t need to open an overseas account or deal with complex cross-border fund transfers. With a U.S. stock account, you can easily purchase ADRs of foreign companies like TSMC or UMC, just as you would buy Apple or Microsoft stocks. This convenience significantly lowers the barrier to investing, making it easier for you to participate in global markets.

Tip: Most popular ADRs are listed on the New York Stock Exchange (NYSE) or NASDAQ, with trading hours synchronized with U.S. stocks, and the process is as simple as trading U.S. local stocks.

Dollar Denomination

When buying or selling ADRs, all transactions are settled in U.S. dollars. The dollar is one of the most widely used currencies globally, with relatively stable value. Many international trade and financial transactions are conducted in dollars, so investing in ADRs with dollars reduces the risk of exchange rate fluctuations. This currency stability gives you more confidence when investing, as you don’t have to worry too much about significant losses due to local currency depreciation.

You can refer to the following comparison:

Risk Diversification

By investing in ADRs, you can choose companies from different countries and industries. This way, you won’t put all your funds in a single market or sector. Even if one region’s economy faces issues, your overall portfolio won’t be heavily impacted. Diversifying risk is a key strategy for long-term investing, and ADRs provide this advantage.

• You can hold TSMC ADR (Taiwan), Alibaba ADR (China), and Petrobras ADR (Brazil) to diversify regional risks.
• You can also select industries like technology, energy, or telecommunications to reduce the impact of fluctuations in a single sector.

High Liquidity

When buying or selling ADRs, you typically enjoy high liquidity. Many large ADRs have active trading volumes in the U.S. market, with small bid-ask spreads. If you want to buy or sell immediately, you can usually transact at a price close to the market value. This is very convenient for those who need to flexibly adjust their portfolios.

Note: Some less popular ADRs may have lower liquidity, so it’s recommended to choose ADRs with high trading volumes to minimize price losses during transactions.

Regulatory Transparency

When investing in ADRs, you benefit from the strict oversight of the U.S. Securities and Exchange Commission (SEC). Companies issuing ADRs must regularly disclose financial reports and significant news. You can easily access this information to understand the company’s operations. This transparency helps you make more informed investment decisions.

• You can check ADR companies’ annual reports, quarterly reports, and announcements on the SEC’s website.
• The U.S. market has clear regulations on information disclosure, reducing the risk of information asymmetry.

Summary: By choosing ADRs, you enjoy not only simplicity in trading but also benefits like dollar stability, risk diversification, high liquidity, and transparency, making them suitable for those looking to participate in international markets.

Main Disadvantages of ADRs

Exchange Rate Risk

When investing in ADRs, although transactions are in dollars, the ADRs represent foreign company stocks. For example, when you buy TSMC ADR, it’s backed by TSMC’s stock in Taiwan. When the exchange rate between the dollar and the Taiwan dollar fluctuates, your investment returns are affected. If the dollar appreciates, you may earn more when converting back to your local currency; but if the dollar depreciates, your returns may decrease. Even if the company performs well, exchange rate changes could reduce your profits or lead to losses.

Tip: Regularly monitor the dollar’s trends against other currencies, especially those of the countries tied to your ADRs, to better manage exchange rate risks.

Liquidity Risk

When trading ADRs in the U.S. market, popular ADRs like TSMC or Alibaba have high trading volumes, making them easy to buy or sell. However, some less popular ADRs have low trading volumes, resulting in larger bid-ask spreads (the difference between buying and selling prices). This means you may have to accept a lower price when selling immediately, increasing costs. Low liquidity can make it harder to adjust your portfolio.

• Popular ADRs: Active trading, small bid-ask spreads, easy to transact.
• Less Popular ADRs: Sparse trading, large bid-ask spreads, may take longer to transact.

Recommendation: Choose ADRs with high trading volumes to reduce liquidity risks.

Custody Fees

When holding ADRs, you typically pay annual custody fees. These fees are charged by the bank issuing the ADR to cover stock custody and management costs. While the fee per share is low (usually about $0.01 to $0.05 per share annually), if you hold a large number of ADRs or invest long-term, these fees can accumulate and affect your actual returns.

Note: Custody fees vary by bank and ADR type, so check the fee details before investing.

Price Premiums or Discounts

When trading ADRs, you may notice that ADR prices sometimes differ from the underlying stock (the foreign local stock). This phenomenon is called “premium or discount.” For example, TSMC ADR may be more expensive (premium) or cheaper (discount) than TSMC’s stock in Taiwan. This price difference can affect your investment returns.

• Research shows that between 2010 and 2022, TDRs (Taiwan Depositary Receipts) frequently exhibited premiums or discounts. Specific risks, dividend yields, liquidity, and investor behavior all influence the extent of premiums or discounts.
• High-risk and low-liquidity ADRs have higher arbitrage costs, making premiums or discounts more pronounced.
• Some investors chase ADRs with high return potential, further amplifying premiums or discounts.
• Another study on five Taiwanese companies issuing ADRs found that ADR prices and underlying stock prices have high information transmission efficiency, but U.S. market sentiment and liquidity can still cause short-term price deviations.

When investing, pay attention to the price gap between ADRs and underlying stocks to avoid losses due to premiums or discounts.

No Voting Rights

When holding ADRs, you typically don’t have shareholder voting rights. This means you cannot participate in shareholder meetings or vote on major company decisions (e.g., board elections, mergers). While you can share in dividends and capital gains, your participation in corporate governance is limited.

• If you value involvement in company decisions, ADRs may not be suitable for you.
• If you simply want to invest and earn returns, ADRs remain a convenient option.

Summary: When investing in ADRs, besides enjoying convenience and risk diversification, you must also be aware of disadvantages like exchange rate risks, liquidity risks, custody fees, price premiums or discounts, and lack of voting rights. Proper risk management is key to long-term gains.

Who Should Invest in ADRs

Diversification Seekers

If you want to diversify your investments, ADRs are a great choice. You can hold stocks from companies in different countries and industries, reducing the risks of single-market fluctuations. For example, you can buy TSMC, Alibaba, and Petrobras ADRs in the U.S. market, so even if one region’s economy faces issues, your overall assets won’t be heavily impacted. According to a Goldman Sachs report, U.S. institutional investors currently hold approximately $830 billion in Chinese stocks (including A-shares, H-shares, and ADRs), and including Hong Kong companies, the total is about $960 billion. This reflects how large investors prioritize risk diversification and actively participate in the ADR market.

Tip: Use an ADR portfolio to flexibly adjust the weighting of different regions and industries, enhancing asset stability.

Dollar Asset Holders

If you already hold dollar assets, investing in ADRs is more convenient. ADRs are priced and settled in dollars, so you don’t have to worry about additional costs from currency conversion. For those who frequently receive dollar income or hold dollar cash, this reduces uncertainty from exchange rate fluctuations. You can simply operate within a U.S. stock account to participate in the growth of global companies.

Investors with Moderate or Higher Risk Tolerance

If you have a moderate or higher risk tolerance, ADRs are more suitable for you. While ADRs offer high liquidity and transparency, they still carry risks like exchange rate fluctuations, price premiums or discounts, and custody fees. You need to be mentally prepared for short-term price volatility and potential losses. If you seek stable returns, understand ADR characteristics before deciding to participate.

Note: Start with a small amount to test the waters, build confidence, and then consider increasing your investment.

How to Trade American Depositary Receipts in Real Time

Open a U.S. Stock Account

To invest in American Depositary Receipts in real time, the first step is to open a U.S. stock account. You can choose Hong Kong banks (e.g., HSBC, Hang Seng) or online brokers (e.g., Futu, Tiger Brokers) to open an account. You’ll need to provide identity proof, address proof, and bank account details. Most platforms support online applications, making the process simple and fast. After opening the account, transfer dollar funds to it for convenient ADR trading.

Tip: Choose a broker with real-time ADR quote functions to stay updated on price changes and improve trading efficiency.

Search for ADR Stocks

After opening your account, use the broker’s platform to search for ADR stocks. Enter the company name or ADR code (e.g., TSM for TSMC ADR), and the system will display relevant stock information. You can view real-time prices, trading volumes, historical trends, and company announcements. Pay attention to trading volumes and choose high-liquidity ADRs to reduce the risk of unexecuted trades.

• Pre-Market Preparation: Check real-time ADR trends and futures markets to gauge market sentiment.
• Review Corporate Earnings: Focus on differences between pre-tax profit, after-tax profit, and market expectations to assess long-term growth potential.

Placing Orders and Notes

Once you’ve selected your target ADR, place an order directly on the platform. You can choose a market order or limit order to flexibly control your buying price. When placing orders, consider technical indicators (e.g., K-line, RSI) to determine trading timing. You can also use a “1:2:6” staggered buying approach—start with a small amount, confirm the trend, then increase your position to reduce risks.

Notes:

• Trading Hours: The U.S. market is generally open from 9:30 PM to 4:00 AM Hong Kong time the next day.
• Fees: Broker fees vary, so compare them carefully.
• Exchange Rate Risk: Currency fluctuations when converting dollars to your local currency can affect returns.
• Establish Trading Discipline: Record trade timing, average share price, and portfolio changes after each trade, and periodically review your strategy.
• Avoid Common Mistakes: Don’t trade frequently due to minor fluctuations or chase highs.

By mastering these steps and techniques, you can participate more effectively in the real-time American Depositary Receipts market and improve your investment success rate.

When investing in American Depositary Receipts, you can enjoy trading convenience, dollar denomination, and risk diversification. However, you must also be mindful of exchange rate fluctuations, custody fees, and price premiums or discounts. It’s recommended to assess your risk tolerance and do your homework using real-time ADR information. This way, you can gradually build your own international investment portfolio.

FAQ

What Are ADR Custody Fees?

When holding ADRs, the issuing bank charges an annual custody fee, typically about $0.01 to $0.05 per share, depending on the bank and ADR type.

Tip: Check fee details on your broker’s platform.

Why Do ADR and Underlying Stock Prices Differ?

ADR prices may be higher or lower than the underlying stock due to factors like exchange rates, liquidity, and market sentiment.

Do ADRs Pay Dividends?

When holding ADRs, you can usually receive company dividends. The issuing bank converts dividends to dollars before distributing them to you.

Note: Dividends are subject to taxes and fees.

Can You Trade ADRs Through Hong Kong Banks?

You can open a U.S. stock account through Hong Kong banks (e.g., HSBC, Hang Seng) or online brokers to trade ADRs directly.

Are ADRs Suitable for Short-Term or Long-Term Investing?

You can use ADRs for short-term or long-term investing. Short-term trading can capture price fluctuations, while long-term investing offers risk diversification and company growth potential.

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