How Does a Sponsored ADR Work?

A sponsored ADR is a unique type of security that is offered in the financial markets. Here are the basics of a sponsored ADR and how it works.

Sponsored ADR

The term ADR stands for American depository receipt. Many times, these securities are traded on the stock market. This is a security that is traded in the United States. However, the security itself represents a certain number of shares in a foreign corporation. Typically, a brokerage or bank in the United States will sponsor this type of security and issue shares that are traded on the market.

Why Sponsored ADRs Exist

The reason that sponsored ADRs are utilized is to allow ordinary investors to invest easily in foreign corporations. Many times, there are certain regulations and rules associated with investing in stock in a foreign country. Therefore, the average investor may have trouble getting involved in other stock markets. With the sponsored ADR, you can work with an American brokerage and gain exposure to the business dealings of a foreign corporation. 

When you purchased foreign stock, you have to worry about the currency exchange rates between your currency and the currency of the issuing corporation. However, with a sponsored ADR, this problem can be avoided completely.

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