Complete Guide to US Stock Market ADRs: How Do Foreign Companies Enter the US Stock Market?

What is ADR? A One-Sentence Explanation

ADR (American Depositary Receipt) is a financial certificate issued by U.S. depositary banks representing foreign stocks, allowing international investors to directly trade non-U.S. companies’ shares on the U.S. stock market. In simple terms, U.S. stock market ADRs are the “passports” for foreign companies to enter the U.S. market.

Rather than saying ADR is a stock, it’s more like a “proxy”—the U.S. depositary bank acts on behalf of foreign companies, converting their shares into certificates that are traded on Nasdaq, NYSE, or OTC markets.

Core Mechanism of ADR: Why Do Foreign Companies Issue ADRs?

For giants like TSMC, Hon Hai, BYD, issuing ADRs in the U.S. market makes perfect sense:

Cost Advantages — Compared to secondary listings, issuing ADRs simplifies the process and reduces costs. Many foreign companies are already listed domestically, avoiding duplicate listing procedures.

Funding Channels — The U.S. capital market is the largest and most active financing pool globally. ADRs enable these companies to access this market directly for fundraising.

Investment Convenience — U.S. investors don’t need to open foreign securities accounts, exchange currencies, or familiarize themselves with local trading rules; a few clicks and they can buy shares of leading foreign companies.

Conversely, for U.S. investors, if a foreign company doesn’t issue ADRs, the investment barrier is very high. You need to open a brokerage account in that country, exchange to local currency, and bear exchange rate risks—that’s the real hassle.

Two Main Types and Three Levels of U.S. Stock Market ADRs

Types of ADRs

Sponsored ADRs — Banks sign agreements with foreign companies, which pay issuance fees. The bank assists with investor transactions. These ADRs comply with SEC regulations, disclose financial info regularly, and carry relatively lower risk.

Unsponsored ADRs — Issued unilaterally by banks, possibly without company involvement, traded only in OTC markets. Higher risk examples include Tencent (TCEHY.US), BYD (BYDDY.US), Meituan (MPNGY.US).

The Three Trading Levels of U.S. Stock Market ADRs

Level 1 ADRs have minimal disclosure and weak liquidity. Levels 2 and 3 are listed on major exchanges, with stricter regulation and better liquidity—most ADRs retail investors encounter are Level 2 or 3.

Key Concept: ADR Ratio and Premium/Discount

How is the ADR ratio calculated?

This is often overlooked but very important: ADR and the local stock are not 1:1 equivalents.

For example, TSMC ADRs are 1:5, meaning 1 ADR equals 5 shares of TSMC listed in Taiwan. In other words, buying TSMC ADR (TSM) is equivalent to buying 5 shares of Taiwan-listed TSMC.

Why is this? Companies set ratios based on local stock prices, exchange rates, and liquidity considerations. If the stock price is too high, it can dampen investor interest, so companies adjust the ratio to ensure a reasonable trading price.

Common ADR ratios for Taiwanese companies:

Premium and Discount: Arbitrage Opportunities

Although Taiwan stocks and U.S. ADRs tend to move similarly, their prices are not perfectly synchronized. When the ADR price (converted to local currency) exceeds the local stock price, a premium appears; when lower, a discount.

For example: TSMC ADR ratio 1:5, if the ADR closes at $92.6, with an exchange rate of 1:30, the converted TWD price is 553 NT$. If the same day the Taiwan stock closes at 533 NT$, the ADR is trading at a premium.

Smart investors sell ADRs when there’s a premium and buy the local stock, or vice versa during discounts, to profit from arbitrage.

Comparing Taiwan Stocks and U.S. Stock ADRs: Five Key Differences

Additionally, due to liquidity, exchange rates, and international market sentiment, their daily trends can differ significantly—same company, different ADR and stock, often show different price movements.

Three Major Risks When Investing in U.S. Stock ADRs

1. Liquidity Risk

Taiwanese companies are less known in the U.S. market. For example, Chunghwa Telecom (CHT.US) has an average monthly trading volume of only 145,000 shares, compared to 12.24 million shares in Taiwan—huge difference in trading depth.

Poor liquidity means wider bid-ask spreads, slippage, and potential market impact from large orders. Retail investors should be cautious.

2. Exchange Rate Risk

U.S. ADRs are priced in USD. If you invest with TWD, you face USD/TWD exchange rate fluctuations.

Scenario: Invest 30,000 NT$ in ADR, converting at 1:30 yields $1000. If the ADR rises 20% to $1200, but the exchange rate shifts to 1:25, converting back yields only 30,000 NT$, so you gain 20% in USD but not in TWD.

If the company’s local currency and USD fluctuate wildly (like RMB or HKD), ADRs will passively bear additional volatility.

3. Information Disclosure Risk

Especially Level 1 ADRs, where companies may not be required to disclose financial reports in the U.S. Investors must look up financial data on the company’s home exchange, increasing due diligence difficulty.

Advantages and Disadvantages of Investing in U.S. Stock ADRs

Advantages: Why Consider?

Favorable Taxation — Taiwanese investors can earn up to 1 million NT$ in profits tax-free in U.S. ADRs; no transaction tax like in Taiwan, and international brokers often have zero commission.

Diversification — Interested in electric vehicles? U.S. stocks have Tesla(TSLA), but you can also invest in Chinese NIO(NIO) via ADRs. One account, global leading companies at your fingertips.

Convenience — Just open an overseas broker account, no need to learn complex foreign trading rules.

Disadvantages: What Risks to Expect?

Account Opening Process — Taiwanese investors need to open an overseas broker account, exchange NT$ to USD, and deposit—incurring currency conversion costs. Alternatively, use Taiwanese brokers, but fees are 1%-2%.

Exchange Rate Risk — USD fluctuations directly impact returns; sometimes stocks gain but currency movements eat into profits.

Liquidity Constraints — Compared to Taiwan stocks, ADRs have shallower trading depth, unsuitable for frequent trading or large volume moves.

How to Judge if U.S. Stock ADRs Are Worth Investing?

Like any stock, the core value of ADRs depends on the company’s fundamentals. Ask yourself:

✓ Is this company’s management stable? ✓ Is the industry outlook bright? ✓ Are relevant policies favorable or unfavorable? ✓ Is the ADR currently at a premium or discount? If premium, is the risk-reward ratio worthwhile?

For example, TSMC ADR surged 32% in early 2023, driven by China’s reopening, strong earnings reports, and industry prospects—these are fundamental reasons, not gambling.

Final reminder: U.S. stock ADRs open a window to global investment, but before every trade, understand the risks you’re taking—exchange rates, liquidity, information gaps. Knowing yourself and the market helps avoid pitfalls.