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Chapter 7. Equity Investments: Taking St... > American Depository Receipt

American Depository Receipt

While you can gain international exposure through the purchase of U.S. companies doing business abroad, you may also want to look at purely international stocks. If you're interested in trading non-U.S. securities, the most efficient way to do that is through buying and selling American Depository Receipts (ADRs), also known as shares. When you buy an ADR, you are buying it and selling it in U.S. dollars; a bank is serving as a clearinghouse for the shares and converts the U.S. dollar into the denomination of the country where the company is based. This means that you have the currency risk associated with that specific country in addition to the volatility of that stock.

Let's take the stock of Sony as an example. Sony is based in Japan but is one of the largest electronics companies in the world. As you may recall, the dollar was very strong against the yen during the late 1990s and into the early part of the first decade of the new millennium. If Sony's stock remained unchanged during that period, the value of the Sony ADR would have gone down based on the yen's value decrease as compared to the U.S. dollar during that period.


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