Quick Answer
Foreign ordinary shares are the same shares local investors buy on a foreign exchange, in the local currency, without a U.S. depositary bank in between. They carry the same currency risk as an ADR but add a foreign broker, foreign settlement cycle, and foreign trading hours, which is why most U.S. retail investors choose ADRs instead.
American Depositary Receipts (ADRs) are the most common way U.S. investors access foreign equities, but they aren't the only option. Understanding the alternative (buying foreign ordinary shares directly) helps clarify why ADRs exist.
What Are Foreign Ordinary Shares?
- U.S. investors may purchase foreign ordinary shares directly on foreign exchanges
- Foreign ordinary shares trade in the local currency of the foreign market (e.g., euros on the London Stock Exchange, yen on the Tokyo Stock Exchange)
- These are the same shares that local investors in that country buy and sell
- Ordinary shares with a pre-existing market outside the U.S. are not treated as a "new issue," so the IPO restricted-persons purchase limits do not apply to them
What Does Direct Foreign Investment Require?
Unlike ADRs, foreign ordinary shares require the investor to manage several additional complexities:
| Requirement | ADRs | Foreign Ordinary Shares |
|---|---|---|
| Broker | Regular U.S. brokerage account | Foreign broker or domestic broker with foreign market access |
| Currency | Trade in U.S. dollars | Must convert to local currency |
| Settlement | Standard U.S. settlement cycle | Different settlement cycles and regulations by country |
| Trading hours | U.S. market hours | Foreign market hours (time zone differences) |
| Regulatory framework | SEC oversight (varies by level) | Foreign regulatory framework |
How Does Currency Risk Compare?
- Both ADRs and foreign ordinary shares expose the investor to currency exchange rate risk
- With ADRs, the depositary bank handles the currency conversion (but risk remains)
- With foreign ordinary shares, the investor manages currency conversion directly
- Neither method eliminates currency risk
Exam Tip: Gotchas
- Neither ADRs nor foreign ordinary shares eliminate currency risk. If asked which method removes exchange-rate risk, the answer is neither: ADRs make the process more convenient, not risk-free.
Why Do Most Investors Prefer ADRs?
ADRs are the preferred vehicle for most U.S. retail investors seeking foreign equity exposure because they:
- Eliminate the need for a foreign brokerage account
- Trade during U.S. market hours
- Settle through the standard U.S. system
- Pay dividends in U.S. dollars
- Are denominated in U.S. dollars (no manual currency conversion)
- Provide SEC-regulated transparency (especially Levels 2 and 3)
Exam Tip: Gotchas
- Convenience does not equal lower risk. ADRs simplify the process (USD-denominated, U.S. settlement, no foreign broker needed), but the underlying currency risk is identical to owning foreign ordinary shares directly.
What Should You Check on Exam Day?
- If a question asks which method eliminates currency risk, the answer is neither ADRs nor foreign ordinary shares
- Match "local currency, foreign broker, foreign settlement" to a foreign ordinary share, not an ADR
- Remember ADRs add convenience (USD pricing, U.S. settlement, no foreign broker), not a risk-free wrapper