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American Depositary Shares

American Depositary Shares or ADSs are foreign issues that are traded on American financial markets.

Expanded Definition

Foreign companies issue American depositary shares to tap into a larger pool of money by allowing American investors to buy the shares, in dollars, on domestic exchanges. Depositary banks and brokers act as the middlemen. This is an easy way for American investors to get foreign exposure in their portfolios without opening foreign accounts or dealing directly with international rules and regulations.

Although things are simplified for investors, legitimate companies are adhering to all the rules of the countries involved and currency exchange rates take their toll, for good or bad. There is no diminishment of risk for the stockholders.

ADSs are actually bundled within American depositary receipts, so you have to know how many shares are in a receipt. And you have to know whether the information you're getting on price, return, etc. is for one share or one receipt, which could include any number of shares, or even a fraction of a share.

Toyota Motor Corp. is one foreign company that trades on U.S. exchanges via ADSs. Type in its ticker (TM) on a ticker search engine such as Yahoo!'s and there will be "ADS" in the title somewhere. Nortel Inversora (NTL) is another example, just to add geographic diversity. But people generally just say they own shares of Toyota, and that's correct, if not precise.

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