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American Depositary Receipts (ADRs): How It Works, Types, and Risks

Erwanto

05 Jan 2026 — 5 min read

If you invest in US markets, you will often see tickers that look like foreign companies but trade on US exchanges. Many of those are ADRs, or American Depositary Receipts.

ADRs let US investors buy shares of non US companies in dollars, through US brokers, without having to deal with foreign exchanges or currencies directly.

This article explains what an ADR is, how it works, its pros and cons, and what retail investors should watch out for before buying one.

What Is American Depositary Receipt (ADR)?

An American Depositary Receipt (ADR) is a certificate issued by a US bank that represents shares in a foreign company.

Instead of buying the stock on its home exchange, you buy the ADR on a US exchange such as the NYSE or Nasdaq, in US dollars, through your usual brokerage account.

Behind the scenes, a US depositary bank holds the actual foreign shares in custody. Each ADR represents a specific number of those shares.

So:

The underlying stock trades in its home market and currency
The ADR trades in the US market in dollars
Prices move broadly in line, adjusted for the ADR ratio and currency changes

How ADRs Work

1. Bank holds the foreign shares

A US depositary bank (for example JPMorgan or Citi) buys or holds shares of a foreign company in the local market and keeps them in custody.

2. Bank issues ADRs

The bank then issues ADRs in the US.

Each ADR represents a certain number of underlying shares, for example:

1 ADR = 1 local share
1 ADR = 2 local shares
1 ADR = 0.5 local share

This ratio is set to make the ADR price more convenient for US investors.

3. ADRs trade like US stocks

ADRs get:

A US ticker (for example TM for Toyota)
A listing on a US exchange or OTC market
Quotes in US dollars

You can buy and sell them during US market hours using market or limit orders, just like any other stock.

4. Dividends and corporate actions

If the foreign company pays dividends:

The dividend is paid in the local currency to the depositary bank
The bank converts it to US dollars
After fees and withholding tax, it passes the amount to ADR holders

For actions such as stock splits or rights issues, the depositary tries to mirror the effect for ADR holders as closely as possible, though details can vary.

Types of ADRs

You may see references to different "levels" of ADRs. The details are more relevant for institutions, but a basic overview helps.

Level I ADRs

Trade over the counter (OTC), not on major exchanges
Lower reporting requirements
Common entry point for companies testing US investor interest

Level II ADRs

Listed on NYSE or Nasdaq
Must meet US regulatory and reporting standards
Often have more liquidity and visibility

Level III ADRs

Used when a foreign company raises capital by issuing new shares in the US
Highest level of disclosure and regulation

As a retail investor, you mainly need to know whether the ADR is exchange listed with good liquidity, or only trades OTC with thinner volume.

ADRs Benefits For Retail Investors

1. Easy access to foreign companies

ADRs allow you to invest in non US companies through a US listed ticker, without:

Opening foreign brokerage accounts
Dealing with foreign settlement systems
Handling currency conversions manually

2. Priced in US dollars

You trade in dollars, see your P&L in dollars, and use the same order types you already know. This keeps the experience simple even though the underlying stock is international.

3. Familiar reporting and regulation

Exchange listed ADRs must comply with US listing standards and provide financial statements in a format that is easier for US or global investors to read and compare.

Risks and Drawbacks of ADRs

ADRs are convenient, but they are not risk free.

1. Currency risk

Even though you trade in dollars, the underlying stock is priced in its local currency. Exchange rate moves between that currency and the dollar can boost or drag on your returns.

2. Fees and dividend friction

The depositary bank may charge ADR fees, usually taken out of dividends. On top of that, foreign withholding tax is often applied before you receive any payment.

3. Liquidity differences

Some ADRs trade with good volume. Others are thinly traded with wide bid ask spreads. Low liquidity can make it harder to enter or exit at a fair price.

4. Political and regulatory risk

You still carry the risk of the company’s home country. Changes in local regulation, capital controls or political tensions can impact the underlying stock and the ADR.

ADRs vs Buying Foreign Stock Directly

If your broker gives you access to multiple markets, you might face a choice:

Buy the ADR in the US
Buy the local share on its home exchange

ADRs are usually simpler for global retail investors because of:

A single currency (USD)
Familiar tax documents from the US side
Standard trading hours and order types

Buying the local stock can sometimes be cheaper on fees or more liquid, but also adds complexity with currencies, settlement and tax reporting.

How Apps Like Gotrade Fit In?

Modern investing apps that focus on US markets often list both US companies and ADRs of international firms.

With Gotrade, you can browse popular US listed stocks and ETFs, see the basic company information and ticker clearly, and invest using small amounts through fractional shares.

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That lets you build a globally diversified portfolio from one US based platform, even while the underlying businesses are spread around the world.

Conclusion

An ADR (American Depositary Receipt) is a simple wrapper that lets you invest in foreign companies through US listed, dollar denominated securities.

For retail investors, ADRs offer an easy way to diversify beyond domestic stocks without handling foreign accounts or currencies directly. At the same time, you still face currency, country and liquidity risks, so basic research is essential.

If you are interested in adding global companies to your portfolio, apps like Gotrade make it straightforward to find and trade US listed stocks and ADRs with small, manageable amounts while you learn.