American investors who want to hold foreign shares of firms that are based in other countries can do so through ADRs (American Depository Receipts). If you aren’t familiar with ADRs, they’re quite simple. A commercial bank has to go to the foreign stock market and purchase shares of a foreign stock. Then, these shares are brought back to the US, where they are put into a trust fund. The commercial bank can issue stock representation certificates that remain in the bank vault until they are sold to the stock market.
When foreign companies pay dividends in their native currency, the bank converts it to US dollars and distributes the money to all certificate owners.
Why It’s Beneficial
Doing so accomplishes many things. American investors can buy/sell ADR in US dollars, which is more convenient than opening a global account with international brokers. Investors can also acquire smaller investments more cost-effectively. You also get your dividends in US dollars, which is highly beneficial because you don’t have to find a way to convert the native currency into your own.
However, the commercial bank where you purchase the stock certificates is going to charge you an ADR fee. They’re usually small compared to the amount of money you get, which helps them cover expenses and ensures you see a reasonable profit.
How It Works
If you go through EuropeFX and trade foreign stocks without the global account, they find ADRs in the United States to help you and determine what the ticker symbol is. If you hold 1,000 ADRs in your account and the company paid about $0.825238 on each ADR, the bank is likely to charge half a penny to facilitate the deal (or $0.005).
For the 1,000 ADR, your statement might look like this:
Qualified Dividends = $825.30
Foreign Taxes Paid = $123.80
ADR Fees = $5.00
Therefore, the large amount would be in your account with the withdrawal of the taxes and fees, giving you a net total of $696.50.
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