ADRs and Global Stock Exchanges: Buying Foreign Companies in New York

An ADR (American Depositary Receipt) is a certificate issued by a US bank that represents shares of a foreign company and trades in US dollars on a US exchange or over the counter. ADRs let you own companies such as Taiwan Semiconductor (TSMC) or Toyota through the same US broker account you use for American stocks. They also add currency risk, home-country taxes on dividends and small fees, and many large companies are not available as ADRs at all, because they trade only on their home exchange.

How an ADR works

1. A US depositary bank buys or holds ordinary shares of the foreign company in its home market.
2. It issues ADRs in the US, each representing a fixed number of those shares, called the ADR ratio.
3. ADRs trade in dollars during US hours. If the ADR drifts away from the value of the shares behind it, professional traders buy the cheaper one and sell the dearer one, which pulls the prices back together.

For example, each TSMC ADR represents five ordinary shares listed in Taiwan. The ratio is set by the depositary and can be changed, so always check it on the company's investor relations page.

Types of ADR

• Level 1: trades over the counter (OTC), not on an exchange, with lighter reporting. Spreads are often wider.
• Level 2: listed on the NYSE or Nasdaq. The company files reports with the SEC, including an annual report on Form 20-F.
• Level 3: listed and also used to raise new money in the US.

Sponsored ADRs are set up with the company's cooperation; unsponsored ones are created by a bank without it and usually trade OTC. Prefer listed, sponsored ADRs.

Not every foreign company in New York uses an ADR. Some list their ordinary shares directly: many Canadian companies trade on both Toronto and New York, and ASML's shares trade on Nasdaq through a similar registry structure. For you as a buyer, these behave much like ADRs.

Extra risks and costs of ADRs

• Currency. The ADR's dollar price moves with the home currency as well as the share.

• Home-country tax on dividends. The company's home country usually withholds tax from dividends under its own rules before the money reaches the depositary.
• Depositary fees. Banks charge a small custody fee, typically a few cents per ADR per year, often taken from dividends or charged through your broker.
• Overnight gaps. Asian and European markets trade while New York is closed. ADRs often gap at the US open to catch up with the home market.
• Political and regulatory risk. Rules on cross-border listings can change. Under US rules on audit inspections, some foreign companies have faced delisting from US exchanges. Shareholders usually keep the underlying shares or receive cash, but the process can be costly and slow.

The world's stock exchanges in brief

Exchange	Country or region	Notes
NYSE and Nasdaq	United States	The largest markets by value; home of most of the world's biggest companies
London Stock Exchange	United Kingdom	FTSE 100 index; many global miners, energy and banking companies
Euronext	Several European countries	Paris, Amsterdam, Milan and other markets
Tokyo Stock Exchange	Japan	Nikkei 225 and TOPIX indices
Shanghai, Shenzhen, Hong Kong	China	Mainland markets have limits on foreign access; Hong Kong is more open
National Stock Exchange, BSE	India	Nifty 50 and Sensex indices
Saudi Exchange (Tadawul)	Saudi Arabia	Home of Saudi Aramco
Pakistan Stock Exchange	Pakistan	KSE-100 index; trades in Pakistani rupees

Several of the world's largest companies, such as Saudi Aramco, Samsung and Tencent, are not listed in New York. Reaching them needs a broker with access to their home market and brings that market's hours, currency and rules.

The Pakistan Stock Exchange

The Pakistan Stock Exchange (PSX) was formed in January 2016 by merging the Karachi, Lahore and Islamabad exchanges. Its best-known index is the KSE-100. Shares trade in Pakistani rupees through brokers licensed by the Securities and Exchange Commission of Pakistan (SECP), so a resident can invest without sending money abroad. Its trading hours and settlement rules are set locally and differ from New York's, including a different Friday timetable, so check the current PSX schedule. Non-resident Pakistanis can also invest in the PSX through special account schemes offered by Pakistani banks; check the current terms with your bank.

The ideas in this course apply to the PSX too: companies, valuation, charts, position sizing and backtesting all work the same way. What differs is liquidity (many PSX stocks trade far less than US giants, so spreads and slippage are larger), the currency and the local rules.

Why DanioX focuses on NYSE and Nasdaq listings

The DanioX stocks section follows the world's 100 largest companies whose shares trade on the NYSE or Nasdaq, foreign ADRs included. Keeping one currency, one set of hours and one type of broker access makes the signals and the backtest consistent. Companies that trade only at home are left out on purpose.

This completes the beginner sections. Next you will learn to read a company's results, starting with revenue, EPS and margins.