How Much is the ADR Fee?
If you are an investor who wants to buy shares of a foreign company, you may have come across the term ADR fee. What is it and how much does it cost? In this blog post, we will explain what an ADR is, how it works, and what fees are associated with it.
An ADR, or American Depositary Receipt, is a certificate issued by a U.S. bank that represents a certain number of shares of a foreign company's stock. The ADR trades on U.S. stock exchanges, such as the NYSE or Nasdaq, as any domestic share would. The advantage of an ADR is that it allows U.S. investors to easily access foreign markets without having to deal with currency conversion, foreign taxes, or different accounting standards.
An ADR is created when a U.S. bank buys shares of a foreign company on its home market and deposits them in a custodian account. The bank then issues ADRs that correspond to the number of shares held in custody. For example, one ADR may represent one, two, or ten shares of the foreign company, depending on the ratio set by the bank.
The bank that issues and maintains the ADR is called the depositary bank. The depositary bank performs various services for the ADR holders, such as collecting dividends, converting them into U.S. dollars, and distributing them to the investors. The depositary bank also handles corporate actions, such as stock splits, mergers, or rights offerings, and communicates with the foreign company on behalf of the ADR holders.
For these services, the depositary bank charges a fee, known as the ADR fee or the custody fee. This fee is usually between one and three cents per share per year, but it may vary depending on the type and level of service provided by the bank. The fee is either deducted from the dividends paid by the foreign company, or billed directly to the investor's brokerage account.
The ADR fee is disclosed in the ADR prospectus, which is a document that contains important information about the foreign company and its ADR program. The prospectus can be found online using EDGAR Company Search or on the depositary bank's website.
The ADR fee is one of the costs of investing in foreign stocks through ADRs. Other costs may include foreign withholding taxes on dividends, currency exchange fees, and brokerage commissions. Investors should be aware of these costs and compare them with other alternatives, such as buying foreign stocks directly or through mutual funds or exchange-traded funds (ETFs).
ADRs are a convenient and popular way for U.S. investors to diversify their portfolios and gain exposure to international markets. However, they also come with some fees and risks that should be understood before investing. By reading the ADR prospectus and doing some research on the foreign company and its market, investors can make informed decisions and avoid unpleasant surprises.