Non-U.S. Corporate Equity (Foreign Ordinary Shares)
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
Requirements for Direct Foreign Investment
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 |
Currency Risk Comparison
- 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. The exam may present a scenario asking which method eliminates exchange rate risk. The answer is neither. ADRs make the process more convenient, not risk-free.
Why ADRs Are Preferred
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.