A:

American depositary receipts (ADRs) allow foreign equities to be traded on U.S. stock exchanges; in fact, this is how the stock of most foreign companies trades in U.S. stock markets. ADRs are issued by U.S. depositary banks, and each one represents one or more shares of a foreign stock, or a fraction of a share. When you own an ADR, you have the right to obtain the foreign equity it represents, although most U.S. investors find it easier to own the ADR.

For example, let's say that shares of CanCorp (a fictitious Canadian company) sell on the Toronto Stock Exchange for C$5.75 (US$5). A U.S. bank buys a number of shares and sells ADRs at a ratio of 2:1. Therefore, each ADR represents two shares of CanCorp and thus should sell for US$10.

ADRs are held in the vaults of the U.S. banks that issue them, although the shares they represent are actually held in the home country of the foreign-based corporation by a representative of the U.S. depositary bank. ADRs simplify the process of exchanging foreign shares: since it is only the receipts that are traded, investors do not need to worry about any exchange rate differences or the need to open special brokerage accounts. Furthermore, ADRs entitle investors to all dividends and capital gains.

An American depositary share (ADS), on the other hand, is the actual underlying share that the ADR represents. In other words, the ADS is the actual share trading, while the ADR represents a bundle of ADSs. For example, if a U.S. investor wanted to invest in CanCorp, the investor would need to go to her broker and purchase a number of ADRs that equal to the amount of CanCorp shares that she wants. In this case, the ADRs are the receipts that the investor has to purchase, whereas the ADSs represent the underlying shares (CanCorp) in which she invested.

To learn more, see our ADR Basics Tutorial, What Are Depositary Receipts? and What parties are involved in the creation of an American depositary receipt?

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 ... Read Answer >>
  2. What parties are involved in the creation of an American depositary receipt?

    An American depositary receipt (ADR) is a legal certificate issued by a recognized U.S. bank that represents a specific number ... Read Answer >>
  3. 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 >>
  4. Which of the following best describes American Depository Receipts (ADRs) ...

    The correct answer is b): ADRs are used to trade foreign securities in the United States. Instead of buying shares of foreign ... Read Answer >>
  5. Can stocks be traded on more than one exchange, such as, for example, on both the ...

    A stock can trade on any exchange on which it is listed. And to be listed it must meet all of the exchange's listing requirements ... Read Answer >>
Related Articles
  1. Investing

    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. ...
  2. Investing

    Investing Beyond Your Borders

    Investing abroad poses risks, but can also help you diversify. Discover ways to invest in foreign stocks.
  3. Insights

    Most Powerful And Influential Public Companies In 3 Metrics

    There are many ways to rank the word's most powerful companies. Looking at market value, brand value or sales revenue are all methods used to rank the biggest companies in the world.
  4. Insights

    Ever Wanted to Own International Stocks? Here's How

    Tips and strategies for users to trade in different exchanges around the world.
  5. Investing

    Playing It Safe In Foreign Stock Markets

    Find out some of the lower-risk ways to invest in foreign markets.
  6. Managing Wealth

    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.
  7. Investing

    Go International With Foreign Index Funds

    As global trade continues to expand and the world's economies grow, spice up your portfolio with these exciting opportunities.
RELATED TERMS
  1. Y

    A letter that appears on a Nasdaq stock symbol specifying that ...
  2. American Depositary Receipt - ADR

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

    An American depositary receipt (ADR) issued by a bank on behalf ...
  4. Depositary Receipt

    A negotiable financial instrument issued by a bank to represent ...
  5. SEC Form F-6

    A filing with the Securities and Exchange Commission (SEC) required ...
  6. Chinese Depositary Receipt - CDR

    A type of depositary receipt that is traded on Chinese stock ...
Hot Definitions
  1. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  2. Sharpe Ratio

    The Sharpe Ratio is a measure for calculating risk-adjusted return, and this ratio has become the industry standard for such ...
  3. Death Taxes

    Taxes imposed by the federal and/or state government on someone's estate upon their death. These taxes are levied on the ...
  4. Retained Earnings

    Retained earnings is the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested ...
  5. Demand Elasticity

    In economics, the demand elasticity refers to how sensitive the demand for a good is to changes in other economic variables. ...
  6. Dark Pool

    A dark pool is a private financial forum or exchange for trading securities.
Trading Center