Want to invest in overseas stocks? First, understand what ADR is.

What Exactly Is an ADR

ADR (American Depositary Receipt) is a tool commonly used by foreign companies to raise capital in the U.S. capital markets. In simple terms, when overseas enterprises want to enter the U.S. stock market, they deposit their shares with a U.S. depositary bank, which then issues corresponding ADR certificates. This allows U.S. investors to trade these foreign company stocks conveniently, just like buying U.S. stocks.

For example, Taiwan’s semiconductor giant TSMC is traded on the Taiwan Stock Exchange under the code 2330 and has issued ADRs on the NYSE under the symbol TSM.US. Investors do not need to open a Taiwan brokerage account; they can directly purchase TSMC’s ADR certificates on U.S. stock platforms.

In other words, we can understand ADR as a substitute for foreign company stocks issued in the U.S., with identical trading properties.

Why Do Overseas Companies Choose to Issue ADRs

Compared to the complex process of directly listing in the U.S., issuing ADRs is more cost-effective and quicker for overseas companies. Many companies are already listed and operating stably in their home countries, so re-listing in the U.S. is often unnecessary. However, as the world’s largest capital market, the U.S. offers unparalleled financing attractiveness. Issuing ADRs becomes the optimal choice for these companies—allowing access to U.S. capital markets while avoiding the cumbersome process of secondary listing.

For investors, the benefits are even clearer. Suppose you want to invest in a foreign-listed company that hasn’t issued ADRs. You would need to: open a securities account in the relevant country → exchange local currency → deposit funds → trade. This series of steps is not only cumbersome but also exposes you to exchange rate risks. With ADRs, everything is simplified—trade in U.S. dollars on U.S. stock platforms, just like buying any other U.S. stock.

Classification and Level System of ADRs

According to issuance method, ADRs are divided into Sponsored and Unsponsored types.

Sponsored ADRs are officially issued by banks on behalf of the foreign company, with a formal agreement between the two. The company retains control and pays issuance fees. These ADRs typically need to comply with the U.S. Securities and Exchange Commission (SEC) regulations and regularly disclose financial reports. They are generally more regulated and reliable.

Unsponsored ADRs involve no official participation from the company and are solely managed by the depositary bank. These ADRs can only be traded over-the-counter (OTC) and carry higher risks. Examples include Tencent (TCEHY.US), BYD (BYDDY.US), and Meituan (MPNGY.US).

Based on the level of access to the U.S. market, ADRs are divided into three levels:

Level 1 ADRs have the weakest liquidity, the least disclosure requirements, and the highest risk. Levels 2 and 3 are listed on formal exchanges, with Level 3 also capable of raising capital, making them important tools for corporate fundraising.

ADR Ratios: An Easily Overlooked Key Point

Many investors make the mistake of assuming that the ADR corresponds 1:1 with the foreign stock. In reality, this is far from true.

For example, Hon Hai (Foxconn) has an ADR ratio of 1:5, meaning 5 shares of Taiwan Hon Hai (code 2317.TW) equal 1 ADR (HNHPF.US). Other Taiwanese companies’ ratios include:

The ratio is usually set based on the stock’s price level and exchange rate. If the stock price is too high, affecting liquidity, the ratio is adjusted to make the unit price more accessible. When calculating ADR prices, this conversion factor must be considered; otherwise, there is a risk of overestimating or underestimating investment costs.

Taiwan Stock vs Taiwan Stock ADR: Six Key Differences

Although both represent ownership in the same company, Taiwan stocks and Taiwan stock ADRs have fundamental differences:

1. Nature and Positioning
Taiwan stocks are directly issued by the company, while Taiwan ADRs are depositary receipts representing the stocks, with different legal natures.

2. Trading Venue and Regulation
Taiwan stocks are traded on the Taiwan Stock Exchange under the supervision of the Taiwan Securities and Futures Commission. Taiwan ADRs are traded on NYSE or NASDAQ and are regulated by the U.S. SEC.

3. Stock Codes
Different trading venues lead to different codes—for example, Hon Hai’s Taiwan stock code is 2317, while its ADR code is HNHAY.

4. Investor Base
Taiwan stocks mainly target local Taiwanese investors, whereas Taiwan ADRs attract global U.S. stock investors.

5. Conversion Ratios
Buying Taiwan stocks involves one share for one share. Buying ADRs requires conversion according to the ratio—e.g., one ADR of TSMC represents 5 Taiwan shares.

6. Premiums and Discounts
Although their price movements are usually correlated, due to factors like trading markets, exchange rates, and investor sentiment, the daily fluctuations of Taiwan stocks and Taiwan ADRs are not perfectly aligned. Sometimes ADRs trade at a premium (overvalue), other times at a discount. For example, in early 2023, TSMC’s ADRs showed similar overall trends from January to March, but the specific percentage changes and timing differed significantly.

Comparison of A-shares and A-shares ADRs

The logic of distinguishing A-shares and their ADR versions is similar to Taiwan stocks:

Three Major Considerations When Investing in ADRs

Liquidity Risk

When trading ADRs, the first concern is liquidity. Many overseas companies are well-known domestically but have low recognition and trading volume in the U.S. For example, China Telecom (CHT.US) had an average trading volume of about 145,000 shares in March, compared to 12.24 million shares traded daily in Taiwan—over 80 times difference. Poor liquidity leads to larger bid-ask spreads, potentially affecting actual transaction prices.

Fundamental Analysis

Investing in ADRs also requires in-depth analysis of the company’s fundamentals—operating conditions, industry outlook, policy environment. Notably, some Level 1 ADRs are not required to disclose full financial reports in the U.S.; investors should review the financial reports published in the company’s home market to make rational judgments.

In early 2023, TSMC’s ADR surged by 32%, driven by multiple factors such as China’s reopening boosting demand, the company’s better-than-expected earnings, and a positive semiconductor industry outlook.

Premium and Discount Strategies

Because Taiwan stocks and Taiwan ADRs can trend differently, savvy investors can exploit arbitrage opportunities through premiums and discounts. For example, with a 1:5 ratio, if the U.S. market closing price on March 22, 2023, was $92.6, the converted TWD price would be 553.3 (calculated as $92.6 ÷ 5 × exchange rate 30). Meanwhile, the Taiwan stock closed at 533 TWD, indicating an ADR premium. Investors can consider selling the premium-priced ADRs and buying the discounted Taiwan stocks, waiting for the price gap to narrow for profit.

The Full Picture of ADR Investment: Pros and Cons

Three Major Advantages

Tax Benefits
Taiwan investors profit from ADR trading without paying income tax if gains are under NT$1 million. Additionally, U.S. stock trading incurs no transaction tax, making the tax burden lighter than Taiwan stocks. Most overseas brokers offer zero-commission trading, significantly lower than Taiwan brokers’ 1%-2% handling fees, especially advantageous for frequent traders.

Diversification
The U.S. stock market has limited investment targets, but through ADRs, investors can access high-quality companies across the global economy. For example, to invest in electric vehicle industry giants, one can choose U.S. Tesla (TSLA.US) or Chinese NIO ADR (NIO.US), achieving true global asset allocation.

Convenient Trading Process
Compared to opening overseas brokerage accounts, exchanging currencies, and remitting funds, ADR trading is no different from regular U.S. stocks, providing a much better experience for international investors.

Three Major Disadvantages

Operational Barriers for Non-U.S. Investors
Taiwanese investors still need to go through steps like opening overseas accounts, converting USD, and transferring funds to participate in ADR trading. Even if using Taiwanese brokers to purchase on behalf, handling fees of 1%-2% apply, which may not be cost-effective.

Exchange Rate Risks
ADRs are traded in USD, so exchange rate fluctuations directly impact returns. For example, investing NT$30,000 (at 1:30 exchange rate, equivalent to $1,000 USD) with a 20% profit yields $1,200 USD. But if the exchange rate shifts to 1:25, converting back to TWD yields only NT$30,000—erasing gains due to currency loss. If the foreign company deals in other currencies (like RMB), multiple exchange rate risks are involved.

Complexity of Information Disclosure
Level 1 ADR companies are not required to disclose full financial reports in the U.S.; investors must actively review their home country financial statements. Cross-market, cross-language information gathering increases costs and the risk of missing critical data.

In summary, ADRs open a convenient gateway for global investors to access overseas capital markets. However, to truly profit, investors must thoroughly understand their operation mechanisms, risk features, and the logic of premiums and discounts, enabling them to navigate the international investment stage with confidence.