## Newcomer's Guide to U.S. Stock Investing: What Exactly Is an ADR? How to Start Trading?

### What is an ADR? A Quick Guide to Foreign Stocks in U.S. Markets

Want to invest in Taiwanese companies like TSMC and Foxconn on the U.S. stock market, but find they are listed both on Taiwan’s stock exchange and in the U.S.? That’s where ADRs (American Depositary Receipts) come into play.

Simply put, an ADR is a certificate issued by a U.S. depositary bank representing shares of a foreign company listed in the U.S. stock market. When a foreign company wants to enter the U.S. market, it usually doesn’t go public directly (due to complex procedures and high costs). Instead, it deposits its shares with a U.S. depositary bank, which then issues corresponding ADRs. This allows U.S. investors to buy and sell these foreign company shares as easily as domestic stocks.

For example, TSMC’s ticker in the U.S. is TSM, which is listed in the form of ADRs on the NYSE. For investors, trading ADRs is essentially the same experience as trading other U.S. stocks.

### Why do companies issue ADRs? Why should investors pay attention?

For foreign companies, issuing ADRs provides a convenient way to access the world’s largest capital market. They avoid the lengthy and costly process of a full U.S. listing, while gaining access to U.S. capital and increasing international brand recognition. Many companies already listed domestically (like TSMC, a leader in Taiwan) choose to issue ADRs to reach global investors.

For investors, ADRs significantly lower the barriers to international investment. Without ADRs, buying shares of a foreign company requires opening a local securities account, currency exchange, fund transfer, and trading—each step involving costs and risks. If a company issues ADRs, investors can trade directly within their U.S. brokerage accounts, just like buying U.S. stocks.

### What types of ADRs are there in the U.S.? The higher the grade, the lower the risk.

Not all ADRs are the same. Based on the cooperation level between the foreign company and the depositary bank, ADRs are divided into **Sponsored ADRs** and **Unsponsored ADRs**:

**Sponsored ADRs** are initiated and managed by the foreign company itself. The bank signs an agreement with the company, which retains control over the ADRs and pays the bank fees. These ADRs must comply with strict SEC regulations, including regular financial disclosures. For example, TSMC (TSM) falls into this category.

**Unsponsored ADRs** are created without the company’s active involvement, and sometimes the company may not even be aware of their existence. These are traded over-the-counter (OTC) and carry higher risks. Companies like Tencent (TCEHY) and BYD (BYDDY) issue unsponsored ADRs.

Beyond the sponsored vs. unsponsored classification, ADRs are also categorized into three levels based on regulatory requirements:

**Level 1 ADRs**: Minimal regulatory requirements, traded only OTC, minimal disclosure, suitable for companies just entering the U.S. market.

**Level 2 ADRs**: Companies must submit more detailed financial reports to the SEC, can be listed on NASDAQ or NYSE, and have higher liquidity.

**Level 3 ADRs**: The most regulated, allowing companies to raise capital through offerings in addition to trading. High-quality companies like TSMC and Foxconn are often Level 2 or 3 ADRs.

Considering liquidity and safety, Level 2 and 3 ADRs generally carry lower risks than Level 1.

### The exchange rate issue between ADRs and local stocks: 1:5 does not mean equal value

A common oversight when investing in ADRs is that **ADR and the local stock are not always 1:1 equivalents**. Companies set conversion ratios based on stock prices, exchange rates, and other factors.

For example, TSMC’s ADR ratio is 1:5, meaning 5 shares of Taiwan’s TSMC (stock code 2330) equal 1 ADR of TSMC in the U.S. (TSM). Similarly, Foxconn is also 1:5, and Chunghwa Telecom is 1:10. These ratios affect the purchase cost and liquidity.

The logic behind setting these ratios is to prevent excessively high or low stock prices from deterring retail investors or discouraging institutional investors. By adjusting the ratio, companies aim to keep ADR prices at a reasonable level in the U.S. market.

### Taiwan stocks vs. Taiwan ADRs: Seemingly the same but fundamentally different

Many investors are confused about the difference between Taiwan stocks and ADRs of the same company. Key distinctions include:

**Trading venues and regulation**: Taiwan stocks are traded on the Taiwan Stock Exchange under Taiwanese securities regulators; ADRs are traded on NYSE or NASDAQ under U.S. SEC regulation.

**Investor base**: Taiwan stocks mainly target Taiwanese investors; ADRs attract global investors.

**Stock codes**: Completely different. TSMC’s Taiwan stock code is 2330, while its ADR is TSM.

**Premiums and discounts**: Although their price movements are generally correlated, due to differences in investor composition, trading hours, and exchange rate fluctuations, the prices of the same company’s Taiwan stock and ADR can differ, sometimes showing premiums or discounts. For example, TSMC’s ADR might trade at a premium (溢價), indicating that U.S. investors are more optimistic and willing to pay higher prices.

### A-shares and A-share ADRs: Listed in China but traded in U.S. markets

Chinese companies listed in China (A-shares) also issue ADRs. For example, BYD is listed in China (stock code 00285) and also has ADRs traded in the U.S. (BYDDY).

The main difference is that A-shares are regulated by China’s CSRC and mainly targeted at Chinese investors; A-share ADRs are traded in the U.S., regulated by U.S. authorities, and aimed at overseas investors. Due to differences in regulatory frameworks and investor structures, the performance of A-shares and ADRs of the same company often diverge.

### Three major risks to evaluate before investing in U.S. stock ADRs

**1. Liquidity risk**

Foreign companies may be well-known domestically but less so in the U.S. market, leading to lower trading volume of ADRs. For example, Chunghwa Telecom’s (CHT) average daily trading volume in U.S. ADRs is about 145,000 shares, far below Taiwan’s 12.24 million shares. This can lead to liquidity shortages and higher volatility during large trades.

**2. Exchange rate risk**

Since ADRs are traded in USD, they are subject to USD-to-local currency exchange rate fluctuations. For instance, if you invest 30,000 TWD to buy ADRs at an exchange rate of 1:30, you get 1,000 USD. If the ADR rises 20%, your account becomes worth 1,200 USD. But if the exchange rate shifts to 1:25, converting back to TWD yields only 30,000 TWD—no profit. Additionally, if the foreign company’s earnings are affected by currency fluctuations, the ADR price will also be impacted.

**3. Disclosure and fundamental risks**

Level 1 ADR companies are not required to disclose full financial reports in the U.S., so investors must actively review the company’s disclosures in its home country. This increases due diligence difficulty. Moreover, ADR investments still depend on the company’s operational health, industry outlook, and policy support.

### The advantages of investing in ADRs should not be overlooked

**Tax and fee benefits**: Taiwanese investors can profit from ADRs tax-free up to NT$1 million, with no transaction tax. For frequent traders, overseas brokers often offer zero or very low commissions.

**Diversification**: The U.S. stock market mainly features American companies. ADRs allow investors to access both U.S. and global firms simultaneously. Want diversified exposure in electric vehicles? You can buy both Tesla (TSLA) in the U.S. and NIO in China via ADRs.

**Trading convenience**: Once you open a U.S. brokerage account, buying any ADR is just like buying U.S. stocks—no extra steps needed.

### Actual costs and difficulties of investing in U.S. stock ADRs

Non-U.S. investors face multiple steps: open an overseas broker account → convert currency to USD → deposit funds → trade. Each step involves costs, including FX fees and exchange rate spreads.

Choosing to buy ADRs through a local broker may save the hassle of currency exchange but often incurs higher fees of 1-2%, increasing overall costs.

### How to use ADR premium and discount for arbitrage

Smart investors monitor the premium or discount between ADRs and local stocks. When ADRs trade at a premium (price after conversion is higher than local stock), they can sell ADRs and buy local stocks for profit; the opposite applies too. However, this requires real-time monitoring of both markets and consideration of exchange rate movements, which can be complex for ordinary investors.

### Summary of investing in U.S. stock ADRs

ADRs open the door for global investors to access foreign companies, especially for Taiwanese, Hong Kong, and Chinese investors, providing a convenient channel to familiar companies. However, investing in ADRs involves risks—liquidity, exchange rates, disclosure issues—that must be carefully evaluated.

Beginners should start by understanding the fundamentals of their target companies, choose liquid Level 2 or 3 ADRs (avoid Level 1), and always keep an eye on exchange rate fluctuations. Only by fully understanding ADRs’ characteristics can investors make informed decisions in the U.S. stock market.