In today’s global economy, it is necessary to diversify your investments. Like most people, you probably have some part of your savings in the US stock market through American Depositary Receipts (ADRs).
If you are thinking about investing in ADRs or currently investing in them, here’s what you should know first:
Your investment is not tied to the performance of the company
An ADR is merely a receipt for shares that an exchange has deposited with an American bank, which guarantees payment by physical delivery. It can be bought or sold on its own just like any other stock on any other exchange.
However, unlike buying shares outright of the foreign company listed on their home stock market, ADRs allow you to buy the equivalent of a certain number of foreign shares without having to transport them, and in some cases hold them in your home country’s currency.
You will pay brokerage fees on top of foreign exchange rates and withholding taxes
The fee that you pay for buying an ADR is usually based on the premium over the actual value of the underlying foreign share. It leads to another caveat: since there is no guarantee that an ADR price will precisely track the share price quoted on its home market, it can trade at somewhat of a premium or discount to what you are paying for the underlying share.
In addition, any dividends that US companies payout need to be sent back overseas (which incurs brokerage fees), and US withholding taxes will be due if dividends exceed a certain amount.
You should check the foreign exchange rates used in calculating your ADR price
Several websites calculate currency equivalents, so you can find out what the actual foreign equivalent value is to its listed price. You could have an overpriced or undervalued position in your accounts if you do not. In addition, there are several different types of ADRs available with varying tax implications, so it is essential to know about these beforehand as well.
It may take longer for your trades to be executed
If you invest in US stocks through Canadian brokers, international investing platforms such as TD Waterhouse or Schwab may enable users to facilitate your trades. However, there’s no guarantee that they will do so, and if you trade an ADR, your trade may take longer to execute than a domestic-traded stock.
You might not be able to buy on margin
Most US brokers allow investors to borrow against the value of their portfolios; however, international accounts often don’t allow this. If you want leverage over your investment position (which is especially useful in more volatile markets), make sure you know whether this is allowed or not beforehand (view the website to find out more).
There will be foreign tax reporting forms for an international account
You should keep track of any dividends, interest earnings, or capital gains from trading in US securities because it can affect your tax liability at the end of the year. You may need to file form T1135 to track your non-US security income, or you may need to declare it on your tax return if the total amount exceeds the C$200 threshold.
US companies are not required to disclose material nonpublic information before its release
As stated here, American laws about insider trading only apply to publicly listed companies whose stock is traded on US exchanges. If you are trading overseas, there is no legal requirement to disclose information about your future movements.
Foreign securities might list on more than one exchange
This list describes some of the notable AMEX-listed international companies. Most US stocks only have listings on either NYSE or NASDAQ; however, foreign firms can list on more than one, so spread your portfolio across many different exchanges–not just NYSE and NASDAQ–to diversify your holdings further.
Can your broker talk with you in English? Saxo Bank provides English-speaking customer service for their accounts, making communication more accessible. However, banking and legal documentation might still be written in Japanese or Chinese, so consider this when looking at fees and brokerage commissions.