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Explanation
An American Depositary Receipt (ADR) is a financial instrument that allows U.S. investors to invest in foreign companies’ stocks without the need to directly purchase shares on foreign stock exchanges.
1. Foreign Company Shares: ADRs represent shares of a foreign company that have been deposited with a U.S. financial institution, typically a bank.
2. Trading on U.S. Exchanges: These ADRs are then traded on U.S. stock exchanges, such as the New York Stock Exchange (NYSE) or NASDAQ, just like regular stocks.
3. Currency Conversion: ADRs are denominated in U.S. dollars, making it convenient for American investors. Any dividends or capital gains are also paid in U.S. dollars.
4. Levels: ADRs come in different levels, each with varying reporting requirements and investor benefits. Level 1 ADRs have the fewest requirements, while Level 3 ADRs have more stringent reporting and governance standards.
Investors in the United States find ADRs useful for diversifying their portfolios with international investments, as they provide exposure to foreign companies and markets while trading in familiar U.S. stock markets. ADRs simplify the process of investing in foreign stocks and help overcome some of the hurdles associated with cross-border trading.