A record-high stock market, rich valuations, and a huge amount of money being printed by the federal government has led investors to look at new options to diversify their portfolio. One of these options is investing in foreign companies.
ADRs, or American Deposit Receipts, were first conceived in the 1920s to help average Americans invest in foreign companies. While it’s easy to invest today, back then it was unlikely that the average person would be able to invest abroad.
ADRs are issued on American exchanges such as the NYSE or Nasdaq by banks that have bought the underlying company’s shares on its foreign exchange, and hold those shares in reserve. Companies work with those banks to issue ADRs and get exposure to American markets. ADRs can have different conversion ratios, but the most common is a ratio of 1:1.
An ADR itself isn’t a share, but a contract between the buyer and the issuing bank. These contracts are backed by the local shares that the bank owns. After listing, ADRs trade on the secondary market like any regular stock, being bought and sold between investors. As such, ADRs track their underlying shares very closely and, generally speaking, any major difference is quickly arbitraged away.