A Complete Guide to US Certificates of Deposit

Index: You can buy ADRs on moomoo.

Diversifying your portfolio is essential to managing risk. Investing in multiple markets around the world minimizes potential losses to your portfolio. If you only invest in US equities, a domestic crash could be a serious blow to your portfolio. But an increase in your foreign investment can offset the crash.

The best part of investing in foreign stocks is the potential profits. The Indian and Southeast Asian markets have proven to be very lucrative for investors. The Indian stock market has exploded in 2021. To minimize your risk, American certificates of deposit (ADR) could be a great way to diversify your portfolio.

BSE Sensex Index (India) – Source: TradingView

What is an American Depository Receipt?

An American Depository Receipt is a negotiable certificate that a US custodian bank issues and specifies the number of shares held in the shares of a foreign company. ADRs are traded on US stock exchanges. They constitute a form of capital guarantee.

Benefits of an American Depository Receipt

In addition to diversifying your portfolio, ADRs offer you a simple way to invest in foreign markets. ADRs also facilitate the access of non-US companies to US capital markets.

Represent the ownership of a foreign stock: ADR investors own foreign stocks. A US bank or broker issues a ADR, which stipulates the number of foreign shares that the institution holds in the foreign market. Each ADR represents the same number of shares. Some ADRs pay dividends.

Trade on US exchanges: The New York Stock Exchange and Nasdaq list ADRs. To offer ADRs, a US bank buys shares on a foreign stock exchange. It holds the stock as inventory and issues ADRs for domestic trading. You can also buy ADRs over-the-counter (OTC). This process involves the trading of securities through a network of brokers. You can trade, settle and hold all listed ADRs as if they were US stocks.

Price in dollars: ADRs are denominated in US dollars. You don’t need to do foreign currency transactions and worry about foreign currencies. US markets price and trade ADRs in dollars, clearing them through a national settlement system.

Liquid way to invest in foreign companies: US investors can easily buy ADRs without going through international brokers and potentially trade their dollars. The liquidation of these securities is just as simple and efficient. Investors do not have to endure a long and arduous process.

Disadvantages of an ADR

Proceeds you receive from ADR holdings may be subject to US income or capital gains tax. He may also be subject to protective custody. And you can be taxed twice. Your dividends and capital gains realized on ADRs are in US dollars.

A US bank withholds the amount necessary to cover conversion costs and foreign taxes. To avoid double taxation, you must claim a credit from the IRS for the capital gains realized. Or you can claim a refund from the foreign government’s tax authority for the same gain.

Types of US Certificates of Deposit

A foreign company wishing to offer its shares to American investors must choose between three different programs. The tier to which a foreign company belongs depends on the extent to which it has accessed US markets. A bank can issue sponsored or unsponsored ADRs in the name of a foreign company.

Sponsored: A domestic bank and a foreign company enter into a legal agreement. The US bank is responsible for the sale, distribution of shares, dividends and record keeping. Usually, the foreign company retains control of an ADR and pays the issuance costs when the bank deals with investors.

The foreign company’s degree of compliance with United States Securities and Exchange Commission (SEC) regulations and United States accounting procedures determines the categorization of sponsored ADRs. Banks working with foreign companies issue only one ADR which is part of the sponsored program. Sponsored ADRs trade on US exchanges.

Not sponsored: A foreign company does not participate, authorize or become involved in an unsponsored ADR certificate. Even brokers and traders can issue the shares. This could cause multiple US banks and brokers to offer different unsponsored ADRs for the same foreign company. Various dividends may accompany these offers.

ADRs are traded over-the-counter and do not include voting rights. Registration with the SEC is not required. Brokers trading ADRs prior to 2008 had to submit a written request to trade them in the United States. The SEC’s 2008 amendment exempted foreign issues that complied with certain regulations.

Level I: Companies that do not want their ADRs listed on an exchange prefer Level I. Foreign companies can use it to establish a commercial presence in the OTC market. They cannot use it to raise capital. Tier I is the only institution that offers unsponsored ADRs.

Tier I companies have minimum SEC reporting requirements. They must file a Form 6. Issuer information is not available on the SEC’s EDGAR system. But the foreign company must publish this information on its website. These companies are not required to publish quarterly or annual reports.

These adverse effects are generally highly speculative. They are riskier than other ADRs, but they are a cheap method for foreign companies to determine US investors’ interest in its security.

Upgrading to Tier II is possible when the issuing company decides to sell on US exchanges.

Level II: Tier II companies cannot use ADRs to raise capital, but they can trade on US exchanges. Their greater exposure and trading volume means they must comply with more SEC regulations than Tier I issuers.

The issuer must register with the SEC using Form 6. The foreign company must file annual reports on Form 20-F with the SEC under generally accepted accounting principles (GAAP) or international accounting standards. financial information (IFRS). The issuer may be delisted or downgraded to Level I if it does not meet all requirements.

Level III: Level III issuers enjoy the greatest number of privileges. This is the highest level that a foreign company can sponsor. In addition to establishing greater trading volume, Tier III issuers can raise capital on US exchanges. They can launch a public ADR offer. But they are required to adhere to stricter reporting rules, similar to those followed by US companies.

The foreign company must file a registration statement on Forms F-1, F-3, and F-4 to offer ADRs. In addition, he must file annual returns on Form 20-F. If the issuer distributes materials to shareholders in its home country, it must submit Form 6-K.

Many large companies are at Level III. Some examples of foreign companies at this level are Vodafone Group (NASDAQ: VO) and Griffols (NASDAQ: GRFS).

Compare ADR brokers

Besides providing the latest market news and trading signals, Benzinga also offers ADR broker reviews. ADRs allow US investors to easily purchase shares of foreign companies in the domestic market. But Benzinga simplifies this process further by offering an overview of the best ADR brokers.

Choosing the right ADR broker for your needs helps you avoid unnecessary fees and wasted time.

What is a DRS?

A direct registration system (DRS) allows the electronic registration of securities in the name of an investor on the books of the issuer. This process enables the electronic transfer of shares between a transfer agent and a broker. The brokerage firm holds the security in book-entry form — you don’t receive a certificate.

The DRS allows investors to hold securities differently. It was born in 1996 because investors did not want their shares to be registered in the name of the company in the event of bankruptcy. This allowed investors to buy or sell through a transfer agent. They could arrange trades through the DRS through their preferred broker.

Investors who hold securities in a book-entry DRS position receive statements from the issuer or its transfer agent confirming ownership of the securities. Then, investors can transfer their DRS book entry position to a bank or broker.

Are ADRs the same as treasury bills?

No. US investors use ADRs to buy shares of foreign companies on domestic stock exchanges and OTC markets. A treasury bill is a government security issued by the US federal government. It matures in 20 or 30 years and earns interest every 6 months until maturity.

At maturity, holders of Treasury bills receive the face value of the bond. They can hold the bond until maturity or sell it before that date. Treasury bonds are considered risk-free because the US government backs them through its ability to tax citizens.

Treasury bonds generally offer a lower rate of return than stocks that pay dividends. They are also exposed to inflation risks. Their sale before maturity could result in a loss since the sale price may be lower than the purchase price. Buying a treasury bill is similar to buying ADR.


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