American Depository Receipts (ADRs)
American Depository Receipts (ADRs)
American Depository Receipts (ADRs) are one of my favorites, because they work the exact
opposite of most derivatives. Instead of making things more complicated, ADRs simplify
things for the average investor.
ADRs are stocks in pools that comprise foreign stocks.
For example, let's say you've heard of this great company in Mexico, Widgeto Incorporado.
You really want to invest in that company, as you've just read they've invented a new widget
made out of adobe. You're convinced the value of Widgeto Incorporado stock is about to go
through the roof.
You could open up a brokerage account in Mexico and go through the normal procedures to
buy Widgeto Incorporado. But, in all honesty, the paperwork involved would be horrendous.
Being a foreign investor in Mexico would be a problem, and such issues as exchange rates
and taxation would be problematic when you tried to bring your profits back to the United
States. The kinds of problems encountered in this type of transaction scare away almost all
individual investors, leaving this type of investment pretty much the stomping ground of
brokerage houses, banks, and other entities large enough to maintain staffs to deal with all
the headaches.
Luckily, these brokerage houses and banks want to do business with you. They've heard the
concerns of you and many of their other in-vestors about not being able to invest in foreign
markets. To address this situation, they have come up with the concept of ADRs. A
brokerage house or bank goes to Mexico and buys a big pool of Widgeto Incorporado stock
and then places the shares in trust.
Plain English
In trust means committing or giving custody of something (in this case, stock) to an
entity (a bank, for example) to be safekept and administered for the benefit of
someone else (investors).
