US Depository Receipts allow US investors to invest in foreign stocks listed on US exchanges in US dollars, avoiding taxes and administrative costs. A US or international bank charges a handling fee or receives a fee from the foreign company, and a depositary bank specializes in day-to-day buying and selling of each individual American Depository Receipt and paying dividends. US investors can use US Depository Receipts to diversify their investments regionally and invest in the world’s best companies.
A US Depository Receipt is a means for US investors to easily invest in foreign stocks. A US depository receipt is listed on US stock exchanges in US dollars. However, its value depends on the performance of the foreign stock represented by the US Depository Receipt in the foreign exchange market in which the stock is traded.
A US bank or an international bank buys a number of shares in a foreign company. It then creates a financial instrument, the American Depository Receipt, to sell on a US exchange. Investors in the United States can indirectly invest in this foreign company using US dollars. This allows the US investor to avoid a large amount of tax and administrative costs that would be incurred if the foreign shares were held directly.
The US or international bank charges a handling fee, which is included in the price of the US Depository Receipt, or receives a fee from the foreign company. In the latter case, the foreign company is willing to pay for the benefit of exposure to a much larger market, the US market.
The US bank that establishes the US depository receipt is also frequently associated with a second US bank. The bank that initiates the process is usually a large investment bank specializing in large-scale investments. This investment bank will partner with a depositary bank that can specialize in the day-to-day buying and selling of each individual American Depository Receipt and paying dividends. This arrangement allows the investment bank to specialize in what it does best and the custodian bank to focus on its area of expertise. Both functions are required, and even very large banks may not have or wish to have all the required expertise in-house.
US investors can use a US Depository Receipt as an easy way to regionally diversify their investments. It often happens that the economy in one region of the world may be booming while another region is in recession. By investing in multiple regions, the investor expects the overall performance of the portfolio to be more consistent. US Depository Receipts also allow US investors to easily invest in the world’s best companies, regardless of the global market in which they operate.
Smart Asset.
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