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What are American Depository Receipts?

American Depository Receipts (ADRs) are one way for you to have exposure to foreign, non-U.S. stocks. The original stock certificate of the foreign security is registered in the name of an American trust company or U.S. bank and held in safekeeping by them. The trust company or bank buys the shares on a foreign exchange and then issues receipts against this stock. These receipts are known as ADRs.

This makes it possible for you to hold shares of non-U.S. corporations that do not trade on American exchanges. The ADR, though, trades on a U.S. exchange. This arrangement makes it easy for a Canadian investor to invest in a foreign issue, because of easy access to the U.S. market. ADRs were developed because buyers of foreign securities found it sometimes took months to have foreign stocks registered in their name.

Example   :GiantBank buys 10 million shares of a non-U.S. stock, called EuroAuto Corp. (EAC). EAC trades on the London Stock Exchange, where GiantBank bought the shares. GiantBank would then offer for sale shares of EAC ADRs.

GiantBank could apply to the New York Stock Exchange to list them. Basically, then, they are repackaged EAC shares, backed by EAC shares owned by GiantBank. They would trade like any other stock on the NYSE, in U.S. dollars.

Dividends paid by EAC would be received by GiantBank and distributed proportionally to EAC ADR holders. If EAC withholds tax on the dividends before this distribution, then GiantBank will withhold a proportional amount before distributing the dividend to ADR holders. Toyota Motor Corporation ADRs, for example, trade on the U.S. NASDAQ exchange. Currency fluctuations would affect the U.S. dollar price of the ADR. For a Canadian investor, the value of your investment would also move up and down with the relative strength or weakness of the Canadian dollar compared to the U.S. dollar. Because ADRs trade on a U.S. exchange, their value may be heavily influenced by the general market trends on that American exchange. ADRs can be held in an RRSP, but count as foreign content. Consider seeking professional advice. An investment suitable for one investor will not necessarily meet your needs.