Recently, I found that many people are still somewhat unfamiliar with the concept of US stock ADRs. In fact, this thing is quite important for those who want to invest in overseas companies. Simply put, ADR is an American Depositary Receipt, allowing foreign companies to be listed on the US stock market and making it easier for American investors to buy foreign company stocks.

Let me first explain how ADR works. Foreign companies hand over their stocks to a US depositary bank, which then issues ADR certificates, so the stocks can circulate in the US stock market. For example, Taiwan's TSMC is listed in Taiwan with the code 2330, but after issuing ADRs in the US, the code becomes TSM, allowing direct trading on the NYSE. For investors, buying ADRs is as convenient as buying regular US stocks, without needing to open a Taiwanese brokerage account.

Why do foreign companies issue ADRs? Mainly because the US market is the world's largest and most active capital market. Many companies are already listed in their home countries but do not want to go through the complex process of secondary listing. Issuing ADRs simplifies the process and also allows them to raise funds in the US, achieving two goals at once. For investors, without ADRs, buying foreign stocks means opening local accounts, currency exchange, and bearing exchange rate risks, which is quite troublesome.

ADRs are divided into sponsored and unsponsored types. Sponsored ADRs are issued through agreements between the company and the bank, requiring compliance with SEC regulations, periodic financial disclosures, and are relatively lower risk. Unsponsored ADRs may have no company involvement and can only be traded over-the-counter (OTC), which carries higher risk. Additionally, ADRs are categorized into three levels: Level 1 can only be traded OTC, while Levels 2 and 3 can be listed on NASDAQ or NYSE, with higher levels subject to stricter regulation.

Here’s an important concept called the ADR ratio. ADRs are not a one-to-one match with foreign stocks. For example, TSMC’s ADR ratio is 1:5, meaning five shares of TSMC in Taiwan equal one ADR. Hon Hai (Foxconn) is also 1:5, but Chunghwa Telecom is 1:10. The company sets the ratio mainly based on the foreign stock price and exchange rate; if the stock price is too high and hampers trading, they will adjust the ratio to improve liquidity.

There are many differences between Taiwan stocks and Taiwan ADRs. First, their nature differs: Taiwan stocks are actual shares, while ADRs are certificates. They are traded in different locations: Taiwan stocks on the Taiwan Stock Exchange, ADRs on NYSE or NASDAQ. Their codes and regulatory bodies are also different. Most importantly, due to different trading venues and investor groups, the stock price movements of the same company can differ, sometimes resulting in premiums or discounts. For example, TSMC ADRs sometimes have a price higher than the Taiwan stock price after conversion, which is a premium. Some investors exploit this difference for arbitrage.

When investing in ADRs, several key points should be considered. First is liquidity: foreign companies may not be well-known overseas, and trading ADRs often involves fewer investors, leading to much lower trading volume than domestic markets. Next is the company’s fundamentals—understanding its operational status and industry outlook. Also, pay attention to exchange rate risk, since ADRs are traded in USD, and fluctuations in the dollar directly impact your returns. For example, a 20% profit could be wiped out or turned into a loss if the USD depreciates.

The advantage of ADRs is lower trading costs. Taiwanese investors trading ADRs with profits under 1 million yuan do not need to pay income tax, and overseas brokers usually charge very low or zero handling fees, much cheaper than Taiwan’s transaction taxes and fees. Additionally, the investment options are more diverse—you can invest in US companies as well as Chinese and Taiwanese companies’ ADRs simultaneously. For example, if you want to invest in electric vehicle companies, you can look at both Tesla and NIO.

However, there are also many disadvantages. For Taiwanese investors, you need to open an overseas broker account, exchange NT dollars for USD, and deposit funds before trading, which involves higher upfront costs and more complicated procedures. If you buy through a Taiwanese broker’s proxy service, the handling fee is about 1-2%, which is more expensive than directly buying ADRs. The biggest risk remains exchange rate fluctuations; changes in USD/TWD exchange rates will directly affect your actual returns, and this is a cost you must bear when investing in ADRs.

Overall, ADRs are a good option for investing in overseas companies, especially well-known foreign enterprises. But before investing, you must understand the mechanisms, ratios, liquidity, and other factors of ADRs, and be mentally prepared for exchange rate volatility. Recently, I’ve also seen many people on Gate paying attention to various overseas assets. In fact, understanding how ADRs work can be very helpful for making investment decisions.