Can You Invest In American Depositary Receipts (ADRs)?

NYSE

What do big and well-known companies such as Alibaba, Grab, Nio, Sony, and Toyota have in common? Well, they are all listed on the NYSE/NASDAQ stock exchange for one; but have you ever noticed that they are listed not as common stocks but as ADRs?

As a matter of fact, plenty of Asian companies have chosen to list their ADRs on US stock exchanges as a method to expand their network of investors who wish to invest in their companies.

This is a testament to the emerging Asian market both technologically and economically. These brands have not just gained popularity domestically but have also earned the respect and

What are American Depositary Receipts (ADRs)?

ADRs are short for American Depositary Receipt. They generally serve as a gateway to international brands by allowing foreign companies to trade on US stock markets. ADRs can essentially be viewed as a personal passport to the international business world with each company akin to a stamp in your investment “passport” aka portfolio.

In a more practical sense, it essentially allows investors to curate an international investment portfolio without the busywork and extra complexity of juggling and managing multiple trading accounts across various Exchanges around the world. This is especially helpful for beginner investors who might not be experienced enough to handle more than a handful of accounts.

However, like all things in life, ADRs come with both upsides and downsides. Here are a few things you should be aware of if you are interested:

What ADRs have to offer

You get the opportunity to invest in foreign companies without the hassle of currency conversions and other cross-border investment procedures.

Advantages:

  • Access to international brands
  • Diversified choices – comprising established giants to promising up and comer brands.
  • Lower currency risk
  • Earn dividends (where applicable)

The downside of trading ADRs

There are some drawbacks to ADR like the fluctuations in exchanges rates that can lead to extra fees.

Disadvantages:

  • Limited choices
  • Extra fees*
  • Market risks associated with local economic conditions.
  • No voting rights.

What are the extra fees you should know

There are typically 5 types of fees that are often associated with trading ADRs that all investors should be aware of.

  • Depositary receipt fees

Covers ADR program creation and maintenance costs. Depending on the ADR, these fees might differ and will typically be deducted from your Cash Upfront account, recorded under cash movement and the monthly statement.

  • Conversion fees

Remember that the “A” in ADR stands for American. This means that it is traded in US dollars. This should not be too much of an issue as investment brokers such as Rakuten Trade can help you convert your Ringgit Malaysia accordingly.

  • Custodian fees

Includes services like dividend payments, voting, and corporate actions.

  • Tax

While not a direct fee, investors should be aware of tax charges related to dividend paying ADRs. A 15% withholding tax on dividends is applied to all foreign investors. Remember to check with your investment brokers if they deduct said taxes from your sales proceeds for you.

  • Trading commissions aka brokerage

Of course, like any investments made, a commission/brokerage is charged. This will vary from one brokerage to another, so remember to double check with your broker.

Adding ADR to your investment portfolio

ADRs offer investors an opportunity to take part in the growth and success of emerging and established Asian brands that are making waves on the global stage.

With the world becoming more interconnected and always-online, ADR also serves as a bridge, connecting investors with brand new opportunities in emerging and foreign markets both within and outside of Asia.

However, like all other investments, there is always a risk involved. Shifting economic conditions and geopolitical risks within foreign countries can throw a wrench into the growth of certain ADRs.

Always remember to invest what you are prepared to lose and you will find yourself in the good position to grow your finances.

This article is contributed by Hooi Mun Keong, Assistant Manager, Digital Marketing & PR, Rakuten Trade. Hooi Mun Keong has an extensive background in dealing in equities. He is a digital Educator at Rakuten Trade and holds a Capital Market Service Representative License, dealing in Securities and Derivatives from the Securities Commission Malaysia.

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