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. 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 ...
  2. What role does the Inspector General play with the Securities and Exchange Commission?

    Understand the purpose of the Office of Inspector General, an independent office contained within the Securities and Exchange ...
  3. How long does it take to execute an M&A deal?

    Read about the mergers and acquisitions process, and find out why the average M&A deal can take half a year to three years ...
  4. How is trading volume regulated by the Securities and Exchange Commission (SEC)?

    Learn about how the SEC uses the trading volume formula as one requirement for an exemption to the ban on the resale of restricted ...
RELATED TERMS
  1. Slander

    Slander is the act of harming one person’s reputation by telling ...
  2. Libel

    Libel is publishing a statement about someone in written form ...
  3. Defamation

    Defamation is any statement (written or spoken) that damages ...
  4. Fair Housing Act

    This law (Title VIII of the Civil Rights Act of 1968) forbids ...
  5. PCI Compliance

    Technical and operational standards that businesses are required ...
  6. Mandatory Binding Arbitration

    A contract provision that requires the parties to resolve contract ...

You May Also Like

Related Articles
  1. Professionals

    Is a Google Robo-Advisor on the Horizon?

  2. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Singapore

  3. Mutual Funds & ETFs

    ETF Analysis: Vanguard MSCI EAFE

  4. Investing

    Why We Need Antitrust Laws

  5. Mutual Funds & ETFs

    Top 3 ETFS for Investing in Germany

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!