ADRs usually give you more than a single share

By
USA Today
February 19, 2008, 2:38 PM ET
3 min read

— -- Q: I'd like to buy shares of Telefonica's American Depositary Receipt (TEF). Why is it so much more expensive than the shares that trade directly on the Spanish stock exchange?

A: Now that investors have largely written off the U.S. economy, it's natural for them to look for opportunities elsewhere.

You can read about some of the ways you can invest in foreign companies here. While some investors prefer to buy shares on foreign exchanges, others buy foreign shares on a U.S. exchange by investing in American Depositary Receipts or ADRs. ADRs are shares created by banks that let investors buy foreign stocks just as easily as they would buy shares of a U.S. company.

There are some intricacies, though, to ADRs. Let's use your example of Spain's Telefonica. As I write this, shares of Telefonica's ADR, which trades by the symbol tef were trading for $83.39. At the same time, the company's shares closed on the Madrid stock exchange for 18.85 euros. You can see the price on Madrid's exchange here.

To convert 18.85 euros to dollars, you can use the currency conversion tool at money.usatoday.com. Just scroll down to the bottom of the page in the Trackers and calculators section. Enter 18.85 into the "For this amount" blank and click the Go button. The site will tell you 18.85 euros was worth $27.69 when this was written.

So, if the shares cost just $27.69 in Madrid, why would anyone pay $83.39 for the ADR? One reason is when you buy the ADR, you're buying more than one share. Many ADRs are bundles of several shares, usually two but sometimes three or more. You can find out the ratio at ADR.com. For Telefonica, every share of the ADR represents three shares of stock.

With that information you can now complete this puzzle. If you divide the ADR's price, $83.39 in this example, by three you get $27.80. That is close to the $27.69 dollar-equivalent price of Telefonica's shares in Madrid.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns.