Recently, many friends have asked me what US stock ADRs are, so I decided to put together an article for everyone. To be honest, many people have been investing in US stocks for years, yet they still have only a partial understanding of the concept of ADRs.

In simple terms, a US stock ADR is a depositary receipt issued in the United States by a foreign company. You can think of it as a kind of “proxy stock.” The foreign company hands its own shares to a US depositary bank, and the bank then issues ADR certificates for investors to trade. What are the benefits of this? Foreign companies don’t need to list in the US to access global financing from the most active capital markets; likewise, investors don’t need overseas accounts, exchange currencies, or learn local trading rules—they can buy foreign company shares directly in the US stock market.

Let’s take an example that everyone is familiar with. TSMC is listed in Taiwan under ticker 2330, but it also issues US stock ADRs under ticker TSM. This is the most practical part of US stock ADRs—opening the door to investing for global investors.

However, there’s one detail to pay attention to: US stock ADRs are not a 1:1 match with the underlying shares. For example, TSMC’s ADR ratio is 1:5, meaning 5 shares of TSMC in Taiwan equal 1 ADR. This ratio is usually set by the company based on the stock price and the exchange rate, with the goal of keeping a reasonable trading price and ensuring liquidity.

ADR programs are also divided into sponsored and unsponsored types. Sponsored ADRs are issued officially by the company and require disclosure of financial information to the US SEC, so they are relatively more regulated. Unsponsored ADRs carry higher risk and can only be traded in the over-the-counter market. In addition, based on exchange level: Level 1 ADRs can only be traded on the OTC market, while Level 2 and Level 3 ADRs can be traded on NASDAQ or the NYSE, and the higher the level, the stricter the regulation.

When investing in US stock ADRs, I think there are a few points that are especially worth noting. First is the liquidity issue. Many foreign companies are well-known in their home countries, but not many people know them in the US stock market, so trading volumes are relatively small. I’ve looked at the trading volume of China Telecom ADRs—their average daily volume in the US is far lower than in the Taiwan market, which means you may face larger bid-ask spreads when buying and selling in the US.

Second is exchange-rate risk. US stock ADRs are traded in US dollars. If the USD appreciates, your investment return will be diluted; if it depreciates, the opposite applies. I’ve seen cases where someone invested and made a 20% profit, but ultimately ended up losing money because the exchange rate moved against them due to currency depreciation. So when investing in US stock ADRs, you shouldn’t only look at the company’s fundamentals—you also need to pay attention to exchange-rate trends.

Next is the premium/discount phenomenon. The Taiwan stock and the ADR of the same company generally move in a similar direction, but due to differences in market sentiment, liquidity, and other factors, the prices can deviate. Some experienced investors use this price difference for arbitrage—for example, when ADRs trade at a premium, they sell ADRs and buy the Taiwan shares.

From an investment perspective, the biggest advantage of US stock ADRs is lower taxes and fees. For Taiwanese investors, if ADR trading profits do not exceed 1,000,000, you don’t have to pay income tax. In addition, overseas broker commissions are very low or even free, which is a clear cost advantage for frequent traders. Also, investment choices are more diversified—you can invest in both US companies and foreign companies. For example, in the electric vehicle sector, you can buy Tesla as well as NIO.

What are the drawbacks? Mainly, the operation process is more complicated. Taiwanese investors need to open an overseas broker account, exchange currencies into US dollars, and deposit funds before they can trade, which involves significant exchange costs. If you place orders through a Taiwan broker, the handling fee can also be 1% to 2%, so the overall cost isn’t low.

All in all, US stock ADRs are a good investment tool—especially for those who want to invest in high-quality companies abroad. But the prerequisite is to understand its risk points—liquidity, exchange rates, and premium/discount—so you can make a more rational investment decision.