American Depositary Receipt (ADR) is a financial instrument issued by American Depositary Banks that represents the shares of foreign companies.The emergence of ADR not only provides global companies with opportunities to raise funds in the U.S. market, but also provides U.S. investors with a more convenient way to invest in foreign companies.Today, we will take you to an in-depth discussion of the definition, advantages and disadvantages, investment strategies, conversion ratio with Taiwan stocks and purchase methods of ADR.If you want to learn more about U.S. stock investment guidelines, you may wish to refer to TSMC ADR, U.S. stock account opening, and entrustment platform!

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What is ADR

American Depositary Receipt (ADR) is a financial instrument in the U.S. market that allows U.S. investors to buy and trade shares of foreign companies in U.S. dollars.Each ADR usually represents a certain number of foreign stocks and is listed on major U.S. exchanges such as the New York Stock Exchange and Nasdaq.This allows U.S. investors to easily access global markets without having to trade in foreign markets separately.

Types of ADR

Depending on the method of issuance, ADRs can be divided into three types:

1. Level 1 ADR: The most basic form, traded only on the over-the-counter market (OTC) and does not follow strict reporting regulations in the United States.
2. Level 2 ADR: Listing on major exchanges must comply with U.S. financial reporting standards and provide more transparency.
3. Level 3 ADR: The most comprehensive form that allows a company to conduct a public offering and requires compliance with all U.S. reporting requirements.

Advantages and disadvantages of ADR

advantages

• Diversified investment opportunities: ADR allows investors to easily invest in foreign companies and increase the diversity of their investment portfolios.For example, investors can hold both Apple (AAPL) in the United States and Alibaba (BABA) ADRs in China, thereby expanding their investment opportunities in technology and e-commerce.
• Lower transaction costs: ADRs typically involve lower fees than trading directly in foreign markets, especially for U.S. investors.
• High market transparency: ADRs must comply with U.S. financial reporting standards, which means investors can obtain more accurate company information and enhance investor confidence.

disadvantages

• The operating process is cumbersome: For non-U.S. investors, the process of investing in ADRs may be relatively cumbersome, requiring opening an overseas brokerage account and conducting foreign exchange transactions.
• Exchange rate fluctuation risk: In the process of investing in ADR, investors need to face the risk of exchange rate fluctuations.For example, if an investor invests in ADR in Taiwan dollars, changes in the exchange rate of the Taiwan dollar against the US dollar may affect its final return.
• Liquidity issues: The trading volume of some ADRs may be low, which may lead to insufficient liquidity and affect investors 'buying and selling decisions.

ADR's investment strategy

When considering investing in ADRs, investors should evaluate the following factors:

• Company fundamentals: Investors should understand the company's business model, financial status and competitiveness in the local market, such as checking key indicators such as the company's financial report, profit growth rate and market share.
• Market dynamics: Pay close attention to macroeconomic factors that affect foreign companies, such as geopolitical risks, economic growth rates and industry trends.These factors may affect the company's performance and share price performance.
• Exchange rate trend: Continue to pay attention to the exchange rate changes between the US dollar and the national currency, which will directly affect the investment return of ADR.Investors can use exchange rate hedging tools to reduce risk.

Conversion of ADR and Taiwan Stock Exchange

When investors consider converting from Taiwan stocks to ADR, they need to understand the conversion ratio.Generally speaking, the conversion ratio of ADRs is determined by the issuing bank and is usually based on the price and demand of foreign stocks.For example, the conversion ratio of some ADRs may be 1:5, which means that every 5 foreign stocks correspond to 1 ADR. The conversion ratio of some Taiwanese stocks is provided below.

How to buy ADR?

For Taiwanese investors, there are two main ways to purchase ADRs: through American securities firms or through re-ordering services from local Taiwanese securities firms.

Buy directly through U.S. brokerages

This is the most direct way and investors need to follow the following steps:

• Open a U.S. broker account: Select a U.S. broker that offers ADR trading (such as Charles Schwab, TD Ameritrade, etc.) and open an account according to its requirements.This usually requires identification and address proof documents.
• Fund remittance: To transfer funds to the account of a U.S. broker, you usually need to convert the New Taiwan dollar into U.S. dollars and pay attention to changes in the exchange rate.
• Place an order for a transaction: Search for the required ADR code on the brokerage platform. For example, the code of TSMC ADR is TSM, and then place an order to purchase.Investors can choose to trade market orders or limit orders.
• Monitor investments: Regularly check the performance of your investment portfolio and adjust your strategy based on market changes.Investors should pay attention to the market dynamics of ADR and the financial reports of related companies.

Through the re-commissioning service of local Taiwanese securities firms

Many Taiwanese securities firms (such as Yuanda Securities, KGI Securities, etc.) provide re-order services that allow investors to purchase ADRs in the Taiwanese market.The steps of this approach are as follows:

• Open a Taiwanese brokerage account: Select a Taiwanese brokerage that supports ADR trading and open a securities account.
• Inquire about re-commission services: Confirm whether the securities firm provides ADR re-commission services, and understand the relevant handling fees and transaction procedures.
• Order trading: Place an order through the brokerage's trading platform and use the ADR code to purchase.At this time, investors do not need to directly deal with U.S. dollar funding and exchange rate issues, as all transactions will be conducted in New Taiwan dollars.
• Note the handling fee: Purchasing ADRs through a Taiwanese brokerage may involve additional handling fees, and investors should understand the relevant fees in detail before placing an order.

Other considerations

• Exchange rate risk: Whether it is a direct purchase or through a re-order, investors need to consider the impact of exchange rate fluctuations.The price of ADR is denominated in US dollars, while the funds of Taiwanese investors are denominated in New Taiwan dollars. Exchange rate fluctuations may affect the final investment return.
• Liquidity issues: The trading volume of some ADRs may be low, which may lead to insufficient liquidity and affect investors 'buying and selling decisions.Investors should choose well-known ADRs to invest to reduce liquidity risk.
• Company fundamentals: Before investing in ADR, investors should understand the basic operating conditions of the company they invest in, including financial reports, industry prospects and market competitiveness. These factors will affect the price of ADR.

Through the above steps and considerations, Taiwanese investors can effectively enter the U.S. market, use ADR to invest in global companies, and expand their investment portfolios.With the acceleration of globalization, ADR will become an important tool for investors to access international markets.

common problems

Q1. What time does ADR open?

U.S. stocks open from 9:30 a.m. to 16:00 p.m. Monday to Friday. However, the United States adopts summer time and winter time, and the corresponding time to Taiwan will vary.Summer time (mid-March to mid-November): Taiwan time from 21:30 to 04:00, Winter time (mid-November to mid-March): Taiwan time from 22:30 to 05:00.

Q2. Does ADR have dividends?

ADR also has dividends. At the same time, because the United States will collect a withholding tax when ordinary foreigners invest in stocks of American companies, although Taiwan has a tax agreement with the United States to obtain a lower tax rate, it is still recommended to choose Taiwanese stocks to avoid additional tax expenses if they want to hold them for a long time.

Q3. Is ADR counted as overseas income?

Since the place of transaction is outside Taiwan, it belongs to income from overseas securities transactions and is included in the basic tax amount.