Investing in ADRs: Pros & Cons for Global Diversification

ADRs are a popular type of security traded on the stock exchange. Here are some of the advantages and disadvantages of investing in ADRs.

Advantages

One of the major advantages that you get by investing in an ADR is diversification. You are investing in a foreign company, which means you are spreading out your investments beyond domestic markets. Therefore, you will be able to withstand economic downswings in the United States much better.

Another advantage of investing in an ADR is convenience. Many individual investors have problems selecting foreign companies to invest in and then figuring out how to invest in them. With an ADR, you are investing in a domestic financial institution that has purchased a certain amount of stock in a foreign company. You will not have to open a separate brokerage account to invest overseas. You can simply place an order with your existing account.

Disadvantages

One of the disadvantages of investing in an ADR is a lack of information. There is not as much information available about many foreign companies as there tends to be about domestic companies. This can increase your risk as an investor.

Another disadvantage of investing in an ADR is that you have to worry about political conditions in the country where the company is located. This can add another layer of risk for you to be concerned with.