Comprehensive Guide to US Stock ADR Investment: From Beginner to Savvy Trader

One-Minute Overview of US Stock ADRs

What exactly are US Stock ADRs? — They are American Depositary Receipts (ADRs) issued by US depositary banks on behalf of foreign companies, representing foreign stocks traded on US securities markets.

Why do they exist? — Foreign companies issue ADRs to access US financing channels, while investors can easily trade international companies on the US stock market without opening local brokerage accounts.

Core risks — Liquidity fluctuations, exchange rate risk, information disclosure differences, additional trading costs.

How US Stock ADRs Work: From Foreign Stocks to US Trading

When a non-US company wants to raise funds in the US capital market, direct listing involves complex regulatory procedures. A more convenient approach is issuing ADRs.

The process is: foreign company deposits its shares with a US depositary bank → the bank issues corresponding ADR certificates → ADRs are traded on NASDAQ, NYSE, or OTC markets.

This design allows US investors to buy international companies as easily as US stocks, using USD for transactions, without currency exchange, opening foreign accounts, or learning local trading rules.

For example, TSMC is listed in Taiwan under the code 2330, but its ADR in the US is TSM.US; both represent shares of the same company.

Why do companies choose to issue ADRs instead of direct listing?

For companies, a direct US listing requires meeting strict SEC requirements, involving complex procedures and high costs. In contrast, issuing ADRs simplifies the process and reduces costs, enabling companies to retain their domestic listing status while entering the world’s largest capital market.

For investors, if a promising foreign company does not issue ADRs, buying its local stock involves:

• Opening a local brokerage account
• Converting currency
• Bearing exchange rate risks
• Learning unfamiliar trading rules

Issuing US ADRs completely eliminates these barriers.

Classification of US Stock ADRs: Understanding What You Are Trading

By Participation Level

Sponsored ADRs

• Issued by depositary banks on behalf of companies, with formal agreements
• Companies retain control over ADRs, pay bank fees
• Comply with SEC regulations, disclose financial info regularly
• Higher regulation, better liquidity

Unsponsored ADRs

• Issued by depositary banks independently, companies may not participate
• Traded only on OTC markets
• Less disclosure, higher risk
• Examples: Tencent (TCEHY.US), BYD (BYDDY.US), Meituan (MPNGY.US)

By Regulatory Level

Level 1 ADRs carry the highest risk due to minimal regulation and disclosure; Level 3 ADRs adhere fully to US listed company standards, with the lowest risk.

Conversion Ratios of US Stock ADRs: Not 1:1

Many investors overlook that US ADRs are not 1:1 equivalents of foreign stocks.

For example, Hon Hai (Foxconn) has a ratio of 1:5, meaning 5 shares of Taiwan Hon Hai (2317.TW) = 1 ADR (HNHPF.US).

How is this ratio determined? Companies adjust based on:

• Foreign stock market prices
• Current exchange rates
• Liquidity considerations (high share prices may reduce trading activity)

Common Taiwan company ADR ratios:

Key Differences Between Taiwan Stocks and Taiwan ADRs

Although they seem to be the same company’s trading instruments in different markets, there are significant differences:

Essential Difference — Taiwan stocks are actual shares; Taiwan ADRs are depositary receipts representing, not direct ownership.

Trading Venue & Regulation — Taiwan stocks trade on the Taiwan Stock Exchange under Taiwanese regulation; Taiwan ADRs trade on US markets under SEC regulation.

Different Ticker Symbols — Hon Hai Taiwan stock code 2317, ADR HNHAY; TSMC Taiwan stock 2330, ADR TSM.

Investor Composition — Taiwan stocks mainly target local Taiwanese investors; ADRs attract global investors.

Conversion Ratios — Buying Taiwan stocks involves 1:1, while ADRs require conversion according to the set ratio.

Premium/Discount Phenomenon — Although trends are similar, market differences, liquidity, and participant composition can cause price deviations. For example, in early 2023, TSMC ADRs showed a premium, with ADR prices higher than Taiwan stock prices, reflecting more optimistic valuation by overseas investors.

Core Differences Between A-shares and A-shares ADRs

Chinese companies listed in the US often issue ADRs:

Core Risks of Investing in US Stock ADRs

Do Not Underestimate Liquidity Risks

Most foreign companies are well-known domestically but have limited recognition overseas; few investors understand or trade their ADRs. Additionally, ADR issuance volume is generally lower than regular stocks.

For example, China Telecom’s ADR averaged only 145,000 shares traded daily in March, while its Taiwan stock had an average daily volume of 12.24 million shares in the same period. US liquidity is much lower. Insufficient liquidity can widen bid-ask spreads and increase slippage costs.

Hidden Costs of Exchange Rate Fluctuations

Trading ADRs requires USD, introducing exchange rate risk. Suppose an investor invests 30,000 TWD in ADRs (at 1:30 exchange rate, converting to 1,000 USD):

• 20% profit makes assets worth 1,200 USD
• But if the exchange rate shifts to 1:25, converting back yields only 30,000 TWD
• Surface profit 20%, but due to exchange rate loss, the actual gain is nullified

Moreover, significant currency fluctuations in the company’s home country can also impact ADR prices.

Challenges in Fundamental Analysis

Investing in ADRs requires evaluating company performance, industry outlook, policy impacts, etc. However, some Level 1 ADRs do not require full financial disclosures in the US; investors must review the company’s domestic financial reports, increasing research costs.

Opportunities and Risks of Premium/Discount Trading

Although ADRs and local stocks tend to move similarly, they are not perfectly aligned. When ADR prices (converted) are higher than local stocks, it’s a premium; lower indicates a discount.

For example, if TSMC ADR ratio is 1:5, and one day the ADR closes at $92.6 (equivalent to 553.3 TWD), while the Taiwan stock closes at 533 TWD, a premium exists. Savvy investors might sell ADRs at premium and buy local stocks for arbitrage, but this requires precise timing and cost control.

Advantages of Investing in US Stock ADRs

Tax Benefits

For Taiwanese investors, profits from US ADRs under 1 million TWD are not subject to income tax. Compared to Taiwan stock trading, which involves transaction taxes, US ADRs have much lighter tax burdens.

Frequent traders benefit: Taiwan stock trading fees are relatively high, while many overseas brokers offer zero-commission trading, reducing costs.

Diversification Opportunities

Traditionally, US stock investments were limited to US companies. The emergence of ADRs breaks this barrier, allowing investors access to high-quality international firms.

For example, in the electric vehicle sector, US investors can invest in Tesla (TSLA.US) or Chinese NIO (NIO.US), achieving regional diversification.

Disadvantages and Costs of US Stock ADR Investment

Complexity for Non-US Investors

Taiwanese investors need to:

1. Open an overseas brokerage account
2. Convert TWD to USD
3. Deposit USD into the brokerage account
4. Start trading

Before trading, currency conversion and transfer costs are incurred. Using Taiwanese brokers to buy ADRs involves fees of 1-2%, much higher than zero-commission overseas brokers.

Cannot Avoid Exchange Rate Risks

Trading ADRs in USD means exchange rate fluctuations directly impact returns. USD appreciation benefits investors; USD depreciation harms them. Significant currency swings in the company’s home country also influence ADR prices.

How to Start Investing in US Stock ADRs

For investors interested in entering the US ADR market, choosing a suitable trading platform is essential. Some overseas brokers offer low-threshold, zero-commission services, supporting direct TWD deposits, simplifying operations.

Before trading, complete these steps:

1. Research the target — Study the company’s domestic financial reports and latest ADR performance
2. Assess risks — Consider liquidity, exchange rates, premiums/discounts
3. Build a position — Start small, gradually increase holdings

Overall, US stock ADRs provide a convenient way for investors to access international markets, but understanding their risk characteristics is crucial for effective investment.