Most large foreign companies can be owned by a U.S. investor in up to three ways: as an ADR, as ordinary shares bought on the home exchange through a broker with international access, or as ordinary shares quoted over the counter in the U.S. under a ticker ending in "F." Each route gives you the same slice of the same company. The differences are in cost, convenience, and how much of the plumbing you handle yourself.
The three routes
1. The ADR
A U.S. depositary bank holds the ordinary shares through a custodian abroad and issues dollar-denominated receipts against them. ADRs trade on the NYSE, Nasdaq, or OTC during U.S. hours and settle through the U.S. system. The mechanics are in what is an ADR.
2. Ordinary shares on the home exchange
You buy the actual shares on, say, the London Stock Exchange or Tokyo Stock Exchange, in local currency, during local hours. This requires a broker with international trading. Some large U.S. brokers offer it through a dedicated account or a trading desk; others do not offer it at all. Our guide to how to buy foreign stocks walks through the options.
3. OTC "F" shares
The same ordinary shares can also be quoted on the U.S. over-the-counter market. A broker-dealer files a Form 211 with FINRA to get a U.S. symbol, which is five letters ending in F. No new shares or receipts are created; the market maker trades the actual ordinary shares, often sourcing them from the home market, and prices them in dollars. By contrast, an OTC ticker ending in Y is an ADR. See OTC foreign stocks.
Costs
| Cost | ADR | Home exchange | OTC F shares |
|---|---|---|---|
| Commission | Usually the same as U.S. stocks | Often higher; may include foreign trading or settlement fees | Often a surcharge for foreign or OTC orders; varies by broker |
| Currency conversion | None on trades; on dividends, done by the depositary | On every trade and dividend, at the broker's rate | Built into the market maker's dollar quote |
| Ongoing fee | Depositary service fee, a few cents per ADR per year | None from a depositary; possible broker custody fees | None from a depositary |
| Spread | Tight on major listed ADRs; wider OTC | Usually tightest, where the main liquidity is | Often the widest |
| Local transaction taxes | Some countries tax ADR purchases too | Apply where the country has them | Can apply |
For a long-term holder, the ADR's annual fee is the main recurring cost; for an active trader, spreads and currency conversion usually matter more. See ADR fees for how to find the actual fee on a given ADR. Exact broker charges change, so check your broker's current pricing schedule.
Liquidity and pricing
For most foreign companies, the deepest market is at home. Charles Schwab, for example, tells clients that ADRs and OTC foreign ordinaries are generally less liquid and more volatile than the local shares, while local markets tend to offer narrower spreads.
A big exchange-listed ADR is the exception: some are among the most actively traded foreign securities anywhere. For small and mid-sized companies, though, an OTC ADR or F share may trade only a few thousand dollars a day. Quotes on F shares can also be stale outside the home market's hours, because the market maker is pricing off a market that is closed. Use limit orders, and compare against the home price converted at the current exchange rate, as shown in ADR ratios and pricing.
Dividends and currency conversion
- ADR: the depositary converts the local-currency dividend into dollars at its own rate, deducts its fees, and pays you dollars. Deposit agreements typically say the bank may earn a spread on that conversion. Details in ADR dividends and currency.
- Home-exchange shares: the dividend arrives in local currency. Depending on the broker, it may be held as a foreign cash balance or converted automatically at the broker's rate.
- F shares: held at a U.S. broker, so dividends are normally converted and paid in dollars by the broker's custody chain. Timing can lag.
In every case your economic exposure to the currency is the same. Only who converts it, and at what cost, changes.
Tax withholding differences
The source country withholds tax on dividends regardless of the route. The rate you are entitled to under a tax treaty generally depends on your status as a U.S. resident, not on whether you hold an ADR or a share. What can differ is whether you actually get the treaty rate up front.
- In some markets, depositaries and custodians can apply the treaty rate when the dividend is paid, provided the required information about the beneficial owner flows through the chain.
- Where relief at source fails, the higher statutory rate is withheld and the excess has to be reclaimed from the foreign tax authority, which can be slow and paper-heavy.
- The longer and less standard the custody chain, as with some F shares and smaller international brokers, the more likely you are to see the full statutory rate.
Country-specific rates and reclaim procedures are covered in foreign dividend withholding, withholding rates by country, and reclaiming foreign tax. Your result depends on your facts, so confirm with a tax professional before acting on a large position.
Corporate actions and voting
Rights offerings, scrip dividends, spin-offs, and tender offers are where the routes diverge most.
- ADRs: the depositary decides how to handle each event under the deposit agreement. If distributing rights or new securities to U.S. holders is not lawful or practical, it may sell them and pass on the cash. Voting is passed through only if the agreement provides for it, and with deadlines earlier than at home.
- Home-exchange shares: you are a direct shareholder through your broker's nominee, so you are generally treated like any other foreign shareholder, subject to local restrictions on U.S. holders and your broker's ability to process the event.
- F shares: processing depends on the U.S. broker's custody chain. Elective events can be hard to act on, and some brokers simply apply the default option.
Key point
An ADR trades convenience for control. You give up some say over corporate actions and pay a small annual fee; in return, everything happens in dollars, in your normal account, on U.S. hours.
Converting between them
Many ADRs can be converted into ordinary shares, and ordinary shares into ADRs, through your broker and the depositary, for a cancellation or issuance fee. Conversion may be blocked where the depositary's books are closed, where foreign ownership caps apply, or for privately placed programs. If you are considering a switch, ask your broker about the fees and timing first, and confirm the tax treatment of the conversion with a tax professional.
Common questions
What does a five-letter ticker ending in F mean?
It identifies a foreign company's ordinary shares quoted on the U.S. over-the-counter market. A broker-dealer obtains the symbol by filing a Form 211 with FINRA; no new shares are created and no depositary is involved.
Is foreign withholding tax lower if I own ordinary shares directly?
Not as a rule. The source country's withholding rate under the tax treaty generally depends on who you are, not on the wrapper. What can differ is the mechanics: whether treaty relief is applied at source or must be reclaimed later, which depends on the custody chain and paperwork.
Can I convert ADRs into ordinary shares?
Usually, if your broker can hold the shares in the home market. You surrender the ADRs to the depositary through your broker, pay a cancellation fee, and receive the ordinary shares abroad. Some programs restrict conversion, for example where foreign ownership limits apply.
Sources
Educational content only, not investment, tax or legal advice. The Stateside Report does not recommend buying or selling any security. Tax rules depend on your situation; confirm with a qualified tax professional. Full disclosures.