Depositary Receipt

AAA

DEFINITION of 'Depositary Receipt'

A negotiable financial instrument issued by a bank to represent a foreign company's publicly traded securities. A depository receipt trades on a local stock exchange, but a custodian bank in the foreign country holds the actual shares. Depository receipts can be sponsored or unsponsored depending on whether the company that issued the shares enters into an agreement with the custodian bank that issues the depository receipt.

INVESTOPEDIA EXPLAINS 'Depositary Receipt'

Two common forms of depository receipts are the American Depository Receipt (ADR) and Global Depository Receipt (GDR). An ADR is listed and traded on exchanges based in the United States, while a GDR can be traded on established non-U.S. markets such as London and Singapore.

When a foreign listed company wants to create a depository receipt abroad, it follows a standard process. The firm will likely hire a financial advisor to help it navigate regulations, and will then choose a domestic custodian bank. A broker in the target country will purchase shares of the firm in the country where the firm is located, and then the domestic bank will register the shares on behalf of the broker. The bank then issues the depository receipt to the broker. The broker can have the shares listed on a local exchange, such as the NYSE, as an ADR.

For example, a firm based in Kenya looking to list shares in the United States through an ADR will pick a Kenyan bank to serve as a custodian of the firm’s shares. Once the bank is chosen, the firm will decide how many shares will be represented by the depository receipt, referred to as the depository receipt ratio, and will find an American broker willing to purchase the shares to be held by the custodian bank. Once the bank issues depository receipts, the American broker can sell those shares domestically.

RELATED TERMS
  1. Safekeeping Certificate

    A document that represents ownership of a security or certificate ...
  2. Global Depositary Receipt - GDR

    1. A bank certificate issued in more than one country for shares ...
  3. American Depositary Receipt - ADR

    A negotiable certificate issued by a U.S. bank representing a ...
  4. American Depositary Share - ADS

    A U.S. dollar-denominated equity share of a foreign-based company ...
  5. Markets in Financial Instruments ...

    A directive that aims to integrate the European Union's financial ...
  6. International Depository Receipt ...

    A negotiable certificate issued by a bank representing ownership ...
Related Articles
  1. 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. ...
  2. Fundamental Analysis

    Derivatives 101

    Learn how to use this type of investment as an alternative way to participate in the market.
  3. Mutual Funds & ETFs

    Modernize Your Portfolio With ETF Futures

    Gain access to premier, highly liquid ETFs with lower capital requirements.
  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. Active Trading

    How Companies Use Derivatives To Hedge Risk

    Derivatives can reduce the risks associated with changes in foreign exchange rates, interest rates and commodity prices.
  6. Active Trading

    Diamonds: The Missing Commodity Derivative

    While they may be "a girl's best friend", diamonds haven't made it to the futures market - yet.
  7. Investing

    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. Securities laws prevent foreign corporations that have shares trading ...
  8. Investing

    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 of shares of a foreign corporation traded on a U.S. stock exchange. ...
  9. Investing

    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 stock of most foreign companies trades in U.S. stock markets. ADRs are ...
  10. Investing

    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 is a financial product issued by U.S. depositary banks and traded on ...

You May Also Like

Hot Definitions
  1. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  2. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  3. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  4. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  5. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  6. Break-Even Analysis

    An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even ...
Trading Center