ADRs and HOLDRs

In troubled economic times we need to know as much as we can about our economy. We need to know some basic things about our economy and about investing. We have been ignorant for too long about the way our economy works and about those who are driving it. The financial crisis was mostly the result of greedy banks and their managers, but it was also the result of some very ignorant people not watching out for themselves. If we are going to avoid this type of crisis in the future we will need to be very cautious about ignorance. We need to become educated about the different parts of our economy and this article should help you to do so. Although the economy is a huge subject and something that none of us completely understand, we can understand little parts and pieces of it that relate to us. And if we are smart about those little parts we will probably be able to keep the whole thing sound. An important but small part of the economy that we all need to learn about is the American Depository Receipt or ADR.

An American Depository Receipt or ADR is a way to invest in a foreign investment while still trading on a US stock exchange. An ADR is a certain amount of stock bought in an investment made in a non United States company. While the foreign company trades its shares on another market, the ADR shares are traded on an American exchange. There are two types of banks needed to issue and sell an ADR. The first is an investment bank that buys some portion of a foreign company. This is the company that then sells its shares in that investment to an American investor. The other bank is a depository bank, which is the bank that actually issues and then can cancel the ADRs.

In contrast a Holding Company Depository Receipt (HOLDR) is a way of trying to measure what a certain group of stocks is doing without incurring a great deal of cost. HOLDRs are usually composed of about twenty stocks across a particular industry. HOLDRs are very cheap to buy and thus allow an investor to particpate in the market without serious risk. HOLDRs are not actively managed like mutual funds. HOLDRs aren't exactly stocks either. HOLDRs can only be purchased in large groups (usually a multiple of one hundred). HOLDRs are a relatively recent phenomenon and were developed by Merrill Lynch.

As you can see, for almost any concerned investor it is important to know what an ADR and a HOLDR actually are. You need to know what an ADR is if you are interested in investing in foreign markets through a US exchange. This is very important because lots of US companies and financial institutions purchase stock in foreign markets. We don't like in a small world anymore. The economy is really a global economy and that is here to stay. What effects the markets in New York effects the markets in Japan.

Knowing what a HOLDR is is actually also quite important. You can see that a HOLDR is a way for an investor to make a small investment without any real risk in order to find out how a particular stock is doing. This kind of investment could prevent you from loosing thousands of dollars.

In such perilous economic times you should be cautious to make any investment without the help of a financial adviser. Realize that investing at this time is very dangerous and that you will need to be patient if you want to see a return.