Investing in ADR

Table of Contents
Chapter 1: What are ADR (American Depository Receipts)
Chapter 2: How Do ADR Work
Chapter 3: Types of ADR
Chapter 4: Investing in ADR

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Chapter 4: Investing in ADR
Factors to Consider Before Investing in ADR
Political Factors
Economic Scenario
Exchange Rate Fluctuations

Chapter 4: Investing in ADR

ADRs have many advantages to offer to investors:

  • They offer a simple way to participate in the economic development of a foreign country, which may be going through rapid industrial growth. Even when the American economy is subdued, other economies may still be flourishing.

  • ADRs are a good way to keep your investments safe when you feel that there is a lot of volatility in the US markets.

  • Complex processes and transactions with foreign brokers and companies can be avoided through ADRs.

  • You use US dollars to make the investment and avoid converting to a different currency to invest in foreign stocks. These currency conversions can be quite expensive and they add to your investment costs.

  • Although the investment is in foreign stocks, ADRs trade like American stocks and are also subject to the same regulations.

Factors to Consider Before Investing in ADR

Before you invest in an ADR, you need to assess its risks just as you would for any US stock. With ADRs, there are also some special factors to consider which will affect how well your investment performs.

Political Factors: You need to have a good understanding of the foreign country’s political situation before you invest in a company there. Unless there is political stability, no economy can flourish. Lack of stability will affect the prospects of all industries and it will reflect in stock prices.

Economic Scenario: Some factors affect only certain economies and the effects may not be visible worldwide. A drought or flood in a country can put immense pressure on its economy. An understanding of the economic scenario in the foreign country is essential to investing in ADRs.

Exchange Rate Fluctuations: Although ADRs are traded in US dollars, their value is linked to the price of the shares in the foreign country. Any fluctuation in the currency of that country will have an immediate impact on value of the ADR. Investors should avoid ADRs of companies whose home currency is known to be volatile against the US dollar.

ADRs are a good investment option to benefit from the growth of foreign companies. Although there are some risks to investing in ADRs, they are still an excellent way to diversify your portfolio and to get some protection from a downturn in the US economy.