Going Global: Selecting ADRs or Foreign Stocks

Key Points

  • ADRs are useful for smaller positions, many having adequate liquidity. They can be traded online during U.S. market hours and are generally marginable.
  • Foreign stocks listed in the U.S. OTC market are an alternative for smaller positions; however, costs tend to be higher than ADRs and the liquidity may not be as strong.
  • Foreign stocks listed in the local market are often the better alternative for orders greater than $5,000, due to their increased liquidity and costs.

Let's say you've decided to invest in a stock. If you've chosen a U.S. stock, your next step might be to place a trade. But if it's a foreign stock, you have another decision to make. Should you buy an American Depositary Receipt (ADR), a foreign stock listed in the US over-the-counter (OTC) market, or a foreign stock on the local foreign exchange?

Indeed, stocks in the same foreign company can often be traded in multiple ways. For example, Toyota, the auto manufacturer, is available as an ADR, a foreign stock (also known as an "ordinary") in the US OTC market, and a foreign ordinary on the Tokyo Stock Exchange in Japan, where the company is listed.

Given this fact, you'll want to consider the available alternatives and select the one that's right for you.

To help you decide, we'll look at:

  • What are the options for investing in individual foreign stocks?
  • What factors should I consider?
  • How to get started.

Please note that this article only addresses foreign investing in a Schwab brokerage account. Additionally, investors also can execute foreign stock trades in a Schwab Global Account.  Please contact a Schwab Global Investing Specialist at 800-992-4685 for more information regarding the Global Account.

Foreign investing: individual stocks 

 

American Depositary Receipts (ADRs)

Foreign ordinaries (over the counter)

Foreign ordinaries (local exchange traded)

Description

Securities that represent shares in a foreign stock, traded on U.S. exchanges in U.S. dollars. 

Shares of foreign companies that are traded on the U.S. over-the-counter market from a U.S. market maker.

Shares of foreign companies that are traded directly on a foreign stock exchange.

Liquidity1

Varies by ADR

Low

Varies, depending on the security and the foreign market

Minimum position size

None

None

None

Trading hours2

U.S. market hours

U.S. market hours

Foreign market hours

Currency exposure

Yes

Yes

Yes

Settlement date

T+3

Varies by country, but usually T+3

Varies by country, but usually T+3

Online trading

Yes

Yes

No (through brokers only)

Margin3

Yes

Rarely

Rarely

Ongoing management expenses

ADRs have custody fees that are levied on a regular basis, such as annually or quarterly.

None

None

Commissions

Regular Schwab commission schedule.

Special Schwab commission schedule. See the Schwab Pricing Guide

Special Schwab commission schedule. See the Schwab Pricing Guide

What are the options?

If you're looking to invest in individual foreign stocks, you could potentially have three ways to invest.

  • ADRs are stocks that trade in the United States but represent a specified number of shares in a foreign company. ADRs are bought and sold on U.S. exchanges—including the NASDAQ, NYSE Euronext, and American stock exchanges, and in the U.S. OTC market—just like regular stocks. They are issued in the United States by a bank or brokerage firm which holds shares of the foreign ordinary in a trust, and then issues receipts (the ADRs) backed by one or more (or more rarely, fewer) shares of the foreign ordinary. ADRs are denominated in U.S. dollars. The value of an ADR rises and falls based on the price of the company's shares traded in their home country. Typically, ADRs represent the shares of large-cap companies from developed markets.
  • Foreign ordinaries (OTC)  are stocks of foreign companies that are traded on the U.S. OTC market. The OTC market is a computer- and telephone-based system. Any stock that does not trade on NASDAQ or a national securities exchange like the New York Stock Exchange can trade over the counter. A number of competing broker-dealers, also called market makers, negotiate directly with each other to price OTC stocks. Because of the cumbersome reporting requirements and expense of listing on registered exchanges, the OTC market has become an attractive platform for international companies to offer their securities in the United States. Trades, although reported in U.S. dollars, include the potential for gain or loss from foreign currency fluctuations.
  • Foreign ordinaries (local exchange traded) are stocks of foreign companies that are traded directly on a foreign stock exchange. Orders are sent from a U.S. broker to local brokers in foreign markets and executed during local market hours. Orders placed after a foreign exchange is closed will be placed in a queue and executed when the market opens. All foreign trades are quoted and settled in U.S. dollars. However, changes in the value of the underlying currency in which your stock is held can impact your investment returns.

What factors should you consider?

As you weigh the available individual foreign stock investments, here are some factors to consider:

  • Liquidity. If you invest in foreign ordinaries through a local exchange, there is more liquidity than in the OTC market or through ADRs. As a result, trades will often execute at a better price.  
  • Information. Listed ADRs—those registered with the SEC and subject to U.S. accounting rules—must file quarterly results, so there may be more investor information available than with a foreign ordinary (both OTC and local market). Please note that unlisted ADRs that trade in the U.S. OTC market have minimal reporting requirements, so information may be less complete and harder to obtain. 
  • Fees. There are additional costs associated with investing in a foreign ordinary (both OTC and local market). These fees can include exchange fees, stamp duties, transaction levies and foreign currency fees. Trading and currency conversion fees will be included in your execution price. For more information on fees, see the Schwab Pricing Guide.

Also note that banks that issue ADRs charge annual custody fees. The amount and timing of custody fees are detailed in the ADR's prospectus. On the whole, ADRs are an easier and more cost effective way to buy shares in a foreign company. They save money by reducing administration costs and avoiding foreign taxes on each transaction. 

  • Market hours. Trades on foreign exchanges are executed during local market hours, which are typically not during U.S. market hours. If you place a trade outside local market hours, your order will be queued up and executed on the foreign exchange at market open.
  • Restrictions. Some countries impose controls that restrict or delay currency conversions on foreign ordinaries, prolonging the time you have to wait until you're able to access your funds. Reporting, clearing and settlement of trades may also take longer. In addition, some countries may place round-lot and/or minimum-lot restrictions on trades made on their exchanges. 
  • Limited availability. Companies that offer ADRs tend to be concentrated in specific countries, and usually only larger firms offer ADRs. Purchasing only ADRs can make it difficult to build a diversified portfolio. In addition, while the foreign ordinary OTC market is growing, it's still limited, and concentrated in large-cap stocks.

Bottom line

Depending on the circumstances, any of the three options may be suitable at a given time. But here are some final thoughts:

  • ADRs. If an ADR is available for a given stock, you may want to consider it if you prefer lower trading costs and want to trade online. ADRs usually have adequate liquidity and are useful for investors who want smaller positions. And unlike foreign ordinary shares, most listed ADRs are marginable.
  • Foreign ordinary (OTC). Another potential alternative for smaller positions is foreign ordinary shares traded on the U.S. OTC market, should they be available. The commission and associated fees are higher than those for ADRs, and the liquidity may not be nearly as strong. But if there isn't an ADR available, the trade amount is for less than $5,000, and you want to place the trade during U.S. market hours, then this may an appropriate way to go.
  • Foreign ordinary (local market). For orders greater than $5,000, local foreign exchanges are often the better alternative, due to their increased liquidity and costs, once the higher trade amount is factored in. Given the much greater liquidity available in these markets, investors are more likely to get a better quote than they would for a similar trade on the OTC market. However, these orders are executed during the local market hours, which may not always be convenient for U.S. investors. 

I hope this enhanced your understanding of ADRs and foreign stocks. I welcome your feedback—clicking on the thumbs up or thumbs down icons at the bottom of the page will allow you to contribute your thoughts. (If you are logged into Schwab.com, you can include comments in the Editor’s Feedback box.)

Next Steps

Talk to Us
To discuss how this article might affect your investment decisions:

  • Call Schwab anytime at 877-338-0192.
  • Talk to a Schwab Financial Consultant at your local branch.

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