🌍 International stocks, ADRs and currency risk

🎯 In 30 seconds: You can own foreign companies from a US account in three main ways: American Depositary Receipts (ADRs) that trade in dollars on US markets, foreign shares bought on a foreign exchange, or funds that hold many foreign stocks. Whichever you use, your return has two parts: what the stock did in its home currency, and what that currency did against the dollar. A 10% gain can become 0% or 20% depending on the exchange rate. ADRs also carry custody fees, foreign tax withholding on dividends, different disclosure rules, and prices that can jump at the US open because the home market traded overnight.

Why look abroad, and what changes when you do

Plenty of large businesses are headquartered outside the US: carmakers, drug companies, chipmakers, banks, consumer brands. Owning some of them spreads your bets across economies, currencies and interest rate cycles that do not move in lockstep with the US.

What changes is everything around the business. Different accounting standards, different reporting schedules, different laws on shareholder rights, a different currency, and a home market that is often closed while New York trades. None of these is a reason to avoid foreign stocks. Each is something to price in.

How an ADR works

An American Depositary Receipt is a US security that represents shares of a non-US company held by a US depositary bank. The SEC describes the mechanics this way: the foreign shares are deposited with the bank or its custodian in the company's home country, and the bank issues ADRs in the US that trade and settle in dollars like any US stock. Holders can also surrender ADRs to get the underlying shares back, which brokers and large traders do when prices drift apart.

Two ADR details to check before buying:

• Sponsored or unsponsored. In a sponsored ADR, the foreign company has a contract with the depositary bank, which handles shareholder mailings and dividends. An unsponsored ADR is set up by a bank without the company's involvement and can trade only over the counter.
• The level. The SEC describes three. Level 1 trades over the counter and cannot raise money; the company files little or nothing with the SEC. Level 2 is listed on a US exchange and the company files an annual report on Form 20-F. Level 3 is listed and can also raise new money in the US. Higher levels mean more information on EDGAR.

The ADR ratio: one receipt is not always one share

An ADR can stand for one underlying share, several, or a fraction of one. The bank picks the ratio to give the ADR a price that looks normal to US buyers. The ADR price should stay close to:

ADR price ≈ home-market share price x shares per ADR x exchange rate

Hypothetical example: one ADR equals 2 shares of a UK company trading at £12.50 in London, and the pound is worth $1.27.

If the ADR drifted to $33, traders could buy shares in London, deposit them for new ADRs and sell those in New York, pocketing most of the gap after costs. That arbitrage keeps the two prices close for actively traded ADRs. For thinly traded ones, gaps can last longer.

Timing matters too. When the London market has already moved in the morning, the ADR usually opens in New York at a price that reflects it. To a US trader that looks like a gap at the open. It is the home market catching up. See Breakouts and gaps.

Currency risk, worked through

Your return in dollars combines the stock's return in its home currency and the currency's return against the dollar:

Dollar return = (1 + stock return in home currency) x (1 + currency return) - 1

Hypothetical case: you put $11,000 into a European stock when one euro costs $1.10, so you own €10,000 of shares. A year later the stock is up 10% in euros, to €11,000. What you end up with depends on the euro:

An ADR does not remove this risk. It only does the conversion for you. Because the ADR price tracks the home price times the exchange rate, a falling euro pulls the ADR down even on a day the stock is flat in Europe. Some international funds hedge currency with forward contracts to strip this effect out, at a cost. Unhedged funds keep it. Neither is better in general; they are different bets.

Dividends: withholding, fees and the foreign tax credit

When a foreign company pays a dividend, its home country often withholds tax before the money leaves. Rates depend on the country and any tax treaty with the US. The depositary bank may also take a custody fee, usually out of the dividend. The SEC's ADR bulletin gives an example range of $20 to $50 per 1,000 ADRs, that is 2 to 5 cents each.

The withheld $75 is not necessarily lost. In a taxable account, US taxpayers can often claim a foreign tax credit against their US tax. The IRS lets you claim it without filing Form 1116 if all your foreign income is passive (like dividends), it is reported on a form such as 1099-DIV, and your qualified foreign taxes are $300 or less ($600 on a joint return). Custody fees are a cost, not a tax, and cannot be credited. For your own situation, check with a tax professional. Taxes for traders covers the US side.

Disclosure and legal differences

• Different forms. Most foreign companies listed in the US are foreign private issuers. They file an annual report on Form 20-F and furnish news on Form 6-K, instead of the 10-K, 10-Q and 8-K. Many do not report quarterly in the US the way domestic companies do. Outside the 20-F, they are generally required to disclose what their home country requires. Since March 18, 2026, their directors and officers do have to file Form 4s, under a law enacted in December 2025.
• Different accounting. Many report under International Financial Reporting Standards (IFRS) rather than US GAAP. Ratios computed on one basis are not always comparable with the other.
• Ownership structures. Some companies based in China list through an offshore shell company that controls the operating business by contract, a variable interest entity (VIE), because Chinese law restricts foreign ownership in some industries. The SEC has warned that US investors in these structures own shares of a shell, not of the operating company itself, and that the contracts may not be enforceable.
• Audit access. Under the Holding Foreign Companies Accountable Act, the SEC must bar trading in a company's shares if, for two years in a row, the PCAOB (the US audit regulator) cannot inspect its auditor because of a foreign government's position. As of October 2026, the SEC's page on the law says no issuers are at risk of a trading ban, because the PCAOB withdrew its 2021 findings about mainland China and Hong Kong in December 2022. That can change if the PCAOB makes a new determination.

Try it

Pick a foreign company that has a US-listed ADR. Find its ratio, then look up its home-market price and the exchange rate on the same morning and compute what the ADR "should" be. Compare with the actual ADR price. Then add it to your Watchlist and, for two weeks, log three numbers at the US close: the ADR's daily change, the home-market change that day, and the currency's change. You will see how much of the ADR's movement came from each.

Sources

• Investor.gov (SEC): Investor Bulletin, American Depositary Receipts
• IRS: Foreign Tax Credit, how to figure the credit
• SEC: Holding Foreign Companies Accountable Act
• SEC: Final rules under the Holding Foreign Insiders Accountable Act (2026)