American Depository Receipts (ADR's)

The last ten years has seen an incredible growth in the number of Americans who now own stock, now up to 49%. Although they have been rewarded greatly in this bull market, the number who own stock outside of the US is considerably smaller.If you get the chance, flip through a few investment magazines and you'll likely see ads touting 100-plus percent returns over the last year for overseas stock funds. The reason is because not just the United States' economy is doing well, much of the global economy is too.

There are a few different ways to take advantage of this, but only two really pertain to the average investor and those are international mutual funds and American Depository Receipts (ADR's). ADR's are basically stocks of companies located outside of the US that are traded on US stock exchanges.A nice advantage that ADR's offer is that they allow you to gain international exposure while being able to control your own portfolio of stocks. For example, if you're interested in investing in the German banking industry you can invest in the stock(s) directly by buying their ADR. That way you don't have to invest in an entire mutual fund just to own that stock.

ADR's also have a few small disadvantages. One is that some aren't listed on large exchanges like the NASDAQ or NYSE. Instead, they might be listed on bulletin boards. This causes their bid and ask price to have a larger spread (difference) and makes it harder to buy shares at the price you want.Also, when you buy an ADR, you are also buying the currency of the country that it is located in because many companies conduct business in other countries. When they do this, they often have to change their currency into another. If you invest in a company whose home currency is weakening against other currencies such as the dollar or euro, you'll most likely see your stock drop. However, this can work to your advantage if you are investing in an ADR whose currency is strengthening.If you want to diversify your portfolio but also want to stick to managing your own stocks, ADR's could be a good investment vehicle for you. Internet sites can help you learn about ADR's and international economies in general.