A:

An American depositary receipt (ADR) is a legal certificate issued by a recognized U.S. bank that represents a specific number of shares of a foreign corporation traded on a <?xml:namespace prefix = st1 /?>U.S. stock exchange. An ADR will be used by a foreign corporation that wishes to have a portion of its equity traded in the U.S. market, but doesn't want to actually list its company's shares on a U.S. exchange.

There are four main parties that come into play with ADRs:

1. The issuing corporation is the first party. This is typically a large foreign-based corporation that is already listed on a major foreign exchange. Rather than dual list its shares on its home exchange and on a U.S. exchange, the issuer sells a bulk amount of its shares to a trusted U.S. party - a recognized bank.

2. A U.S. bank is the second party in this process; by accepting the issuing company's shares and selling representative certificates to investors, the bank is said to sponsor the security, making it accessible to investors in the ADR's local market. Essentially, the bank accepts the shares from the foreign corporation, stores all of them in its vault, and prints a bunch of certificates that represent the shares. Those certificates are then issued to investors via an exchange.

3. A major U.S. exchange (i.e. NYSE or Nasdaq) then lists the bank's certificates for trading, allowing investors to buy and sell ADR units just as they would normal shares. (For further reading, see Getting To Know Stock Exchanges.) Investors set market prices for the ADRs through the bidding process, pricing and freely trading the units back and forth in U.S. dollars. Because they are ADRs, investors avoid the problem of converting into foreign currency each time the units are bought and sold. They also don't have to deal with foreign trading rules or laws; however, the appropriate Securities and Exchange Commission (SEC) rules do apply.

4. The SEC is the fourth major party involved in ADRs. While it plays no direct role in the issuance and trading of the ADR units, the SEC requires ADR issuers to file certain documents with the SEC before allowing the proposed ADR units to be issued and traded in the U.S. markets.

To learn more, check out What Are Depositary Receipts? and our ADR Basics tutorial.

RELATED FAQS
  1. Why are big foreign companies considering delisting their American depositary receipts?

    American depositary receipts (ADRs) were developed to give investors an easier way to invest in foreign companies. An ADR ... Read Answer >>
  2. How are American Depository Receipts (ADRs) exchanged?

    Learn specifics about American depositary receipts, including how they are exchanged and some of their advantages and disadvantages. Read Answer >>
  3. How are American Depository Receipts (ADRs) priced?

    Understand what American depositary receipts are and how they work, including how the price of ADRs is determined by the ... Read Answer >>
  4. What factors must a company consider before establishing an American Depository Receipt ...

    Learn which factors a foreign company must consider before establishing an American Depository Receipt, or ADR, program in ... Read Answer >>
  5. Does a company's American depositary share equal one share of common stock?

    American depositary shares (ADS) come into play when a foreign company wants its shares to trade on a major American exchange. ... Read Answer >>
  6. What are the differences between Levels I, II, and III American Depository Receipts ...

    Understand the difference between sponsored American depositary receipts categorized within Level I, II or III. Read Answer >>
Related Articles
  1. Options & Futures

    20 Investments: American Depository Receipt (ADR)

    What Is It? Introduced to the financial markets in 1927, an American Depository Receipt (ADR) is a stock that trades in the United States but represents a specified number of shares in a foreign ...
  2. Investing Basics

    Investing in Foreign Stocks: ADRs and GDRs

    Depositary Receipts are easy ways to invest in foreign stocks, regardless of what part of the world you live in.
  3. Investing Basics

    Introduction To American Depositary Receipts (ADRs)

    Investors should look beyond the confines of the U.S. borders to diversify and maximize returns. ADRs are one way to diversify your portfolio and help you achieve better returns when the U.S. ...
  4. Bonds & Fixed Income

    An Introduction To Depositary Receipts

    Learn about a security that allows you to invest in a foreign company through your local exchange.
  5. Investing

    Introduction To American Depository Receipts ADRs

    ADRs can open up a whole new world for investors. Find out what they are and how they work.
  6. Economics

    ADR Basics: Risks

    There are several factors that determine the value of the ADR beyond the performance of the company. Analyzing these foreign companies involves further scrutiny than merely looking at the fundamentals. ...
  7. Investing

    How To Trade Foreign Stocks

    We weigh the major ways to trade foreign stocks for investors.
  8. Mutual Funds & ETFs

    Playing It Safe In Foreign Stock Markets

    Find out some of the lower-risk ways to invest in foreign markets.
  9. Investing Basics

    Here's How To Tap International Markets (PBR, VALE)

    Access to foreign markets has grown a lot in recent years, allowing US market players to trade these bourses in real-time.
  10. Forex Education

    The 3 Biggest Risks Faced By International Investors

    Investing internationally is a great way to diversify your portfolio, but you need to know the risks.
RELATED TERMS
  1. American Depositary Receipt - ADR

    A negotiable certificate issued by a U.S. bank representing a ...
  2. Sponsored ADR

    An American depositary receipt (ADR) issued by a bank on behalf ...
  3. Y

    A letter that appears on a Nasdaq stock symbol specifying that ...
  4. Unsponsored ADR

    An American depositary receipt (ADR) issued by a depositary bank ...
  5. Average Daily Rate - ADR

    A metric widely used in the hospitality industry to indicate ...
  6. SEC Form F-6

    A filing with the Securities and Exchange Commission (SEC) required ...
Hot Definitions
  1. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  2. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  3. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  4. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  5. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  6. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
Trading Center