A:

American depositary shares (ADS) come into play when a foreign company wants its shares to trade on a major American exchange. Securities laws prevent foreign corporations that have shares trading in a foreign market to directly list their shares on U.S. stock exchanges (exceptions do occur, such as for Canadian companies).

Because of this, foreign companies are forced to create ADS, which represent the full rights of the common stock they are based on. ADS are then securely held by a bank or financial institution in the foreign company's country, at which point American depositary receipts (ADR) are created to represent the ADS and are listed on the desired American exchange.

ADR are typically the units investors buy and sell on U.S. exchanges. ADR represent the ADS units held by the custodian bank in the foreign company's home country. ADR can be issued against ADS at any ratio the company chooses. For example, ABC company could have ADR trading on the New York Stock Exchange (NYSE) These ADR could be issued at a rate of five ADR equal to one American Depository Share (5:1), or any other ratio the company chooses.

The underlying ADS, however, most often correspond directly to the foreign company's common shares. In other words, the ratio of ADS to common shares is usually one, while the ratio of ADR to ADS can be whatever a company decides to issue them at. Sometimes firms can issue ADS to represent more than one common share each, but usually the ratio is one-to-one.

To learn more about this topic, consider reading our ADR Basics Tutorial and What Are Depositary Receipts?

RELATED FAQS

  1. What is the difference between a green field and a brown field investment?

    Read about the advantages and disadvantages of pursuing green field or brown field investments in the foreign direct investment, ...
  2. What does it mean when a country has little activity in its capital account?

    Know what a country's capital account represents and understand what the implications are if a country has little activity ...
  3. Is there an index for tracking mid-cap stocks?

    Learn the specifics about indexes available for tracking companies with market capitalizations in the medium-sized, small ...
  4. 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.
RELATED TERMS
  1. Welfare Capitalism

    Definition of welfare capitalism.
  2. Foreign remittance

  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. Corporate Inversion

    Re-incorporating a company overseas in order to reduce the tax ...
  6. Foreign Portfolio Investment - FPI

    Securities and other financial assets passively held by foreign ...

You May Also Like

Related Articles
  1. Mutual Funds & ETFs

    Top Foreign Debt ETFs & Funds for Diversification

  2. Investing News

    A New Corporate Governance Initiative ...

  3. Investing

    How To Trade Foreign Stocks

  4. Bonds & Fixed Income

    African Equities vs. Bonds: Risks and ...

  5. Mutual Funds & ETFs

    What companies are positioned to grow ...

Trading Center