An American depository trust or American depository receipt (ADR) is a negotiable certificate that represents a specified number of shares of a stock listed on a foreign exchange that are held by a U.S. financial institution.
American depository trusts offer all the benefits of conventional stock ownership, such as dividends and shareholder rights, but with some limitations due to the complex ownership structure.
Many major U.S. exchanges allow the listing of ADRs, and there are a number of over-the-counter (OTC) options for trading ADRs as well.
Capital Gains, Dividends and Rates of Exchange
The capital gains and dividends of an American depository receipt are denominated in U.S. dollars. However, the financial institution holding the foreign shares in the ADR will charge the owner a fee for converting any dividends from the local currency of the listing market to the U.S. dollar.
Benefits of American Depository Receipt
The benefits of ADRs are their simplicity and transparency. U.S. investors do not need to transact with foreign currencies to buy and sell ADRs.
In addition, the holding U.S. financial institution will vet these foreign companies to ensure that they meet the high U.S. standards of conduct and financial reporting, which makes it much easier for U.S. investors to gauge the worth of foreign shares listed on foreign exchanges that have different regulatory standards.
Trading American Depository Receipt
ADRs represent a potential trading opportunity for day traders due to their relative obscurity. ADRs represent foreign companies that meet U.S. regulatory standards, but are not traded by a large pool of investors.
This creates an opportunity for more variable price action and arbitrage, which are ideal situations for many day trading strategies.
ADRs are an excellent source for day trading opportunities. Their high standard of regulatory compliance allows day traders to invest with confidence, while their relative obscurity means that they will produce day trading opportunities that are less common among conventionally-listed shares.