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. Is there a difference between ADR and ADS?

    American depositary receipts (ADRs) allow foreign equities to be traded on U.S. stock exchanges; in fact, this is how the ... Read Answer >>
  6. 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 >>
Related Articles
  1. Economics

    ADR Basics: What Is An ADR?

    Introduced to the financial markets in 1927, an American depositary receipt (ADR) is a stock that trades in the United States but represents a specified number of shares in a foreign corporation. ...
  2. 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 ...
  3. Economics

    ADR Basics: Conclusion

    With globalization dissolving borders, it only makes sense that we have the ability to invest in foreign entities. Many nations who are striving to become industrialized are undervalued compared ...
  4. 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.
  5. 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.
  6. Options & Futures

    Go Global With ADRs

    The only real difference between you and Warren Buffett is a few well-chosen stocks – the billion-dollar fortune is the result.
  7. Professionals

    International Investing

    NASAA Series 65: Section 10 International Investing. In this section international investing is discussed with a focus on risks and opportunities including ADRs.
  8. 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.
  9. Economics

    ADR Basics: Determining Price

    Now that you've learned how an ADR is established and sold to the public, let's delve a little deeper. In this section, we'll examine how the price of an ADR is determined. Let's use an example ...
  10. 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. ...
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. American Depositary Share - ADS

    A U.S. dollar-denominated equity share of a foreign-based company ...

You May Also Like

Hot Definitions
  1. Goodwill

    An account that can be found in the assets portion of a company's balance sheet. Goodwill can often arise when one company ...
  2. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  3. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  4. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  5. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
Trading Center