What Is an American Depositary Receipt (ADR)?
An American Depositary Receipt (ADR) is a certificate issued by a U.S. bank that represents ownership of shares in a foreign company. The ADRs are traded on a U.S. stock exchange, making it easier for U.S. investors to invest in foreign companies without having to deal with foreign currencies or trade on foreign stock exchanges.
When a foreign company decides to issue ADRs, it typically hires a U.S. bank to act as a depositary. The bank then buys shares of the foreign company and issues ADRs based on those shares. The ADRs can be issued in different levels, with each level corresponding to a certain number of shares. For example, Level I ADRs may represent one share of the foreign company, while Level II or III ADRs may represent multiple shares.
By owning ADRs, U.S. investors can benefit from the dividends and capital appreciation of the foreign company’s shares. However, there are some risks associated with investing in ADRs, including foreign currency risk, political risk, and the risk of differences in accounting and reporting standards between the U.S. and the foreign company’s home country.
ADRs are regulated by the Securities and Exchange Commission (SEC) and are subject to the same disclosure and reporting requirements as U.S. companies.
How American Depositary Receipts (ADRs) Work?
American Depositary Receipts (ADRs) work by allowing U.S. investors to purchase shares in a foreign company without having to directly trade on a foreign stock exchange or deal with foreign currencies. Here’s how the process typically works:
- A foreign company decides to issue ADRs and hires a U.S. bank to act as a depositary. The bank may then purchase shares of the foreign company in the local market.
- The depositary bank issues ADRs representing ownership of the shares it purchased. The ADRs may be issued in different levels, with each level corresponding to a certain number of shares.
- The ADRs are listed and traded on a U.S. stock exchange. U.S. investors can purchase ADRs through their broker just like they would any other U.S. stock.
- Dividends are paid in U.S. dollars to ADR holders by the depositary bank, which deducts any fees and expenses before passing on the payment to the ADR holders. Capital gains and losses are also calculated in U.S. dollars.
- The depositary bank may also offer additional services to ADR holders, such as proxy voting in the foreign company’s annual meeting and the ability to convert ADRs back into the foreign company’s shares.
It’s important to note that ADRs are subject to various risks, including foreign currency risk, political risk, and the risk of differences in accounting and reporting standards between the U.S. and the foreign company’s home country. Investors should carefully research any ADRs they are considering buying and consult with a financial advisor if needed.
