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. American Depositary Receipt - ADR

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

    An American depositary receipt (ADR) issued by a depositary bank ...
  4. Global Depositary Receipt - GDR

    1. A bank certificate issued in more than one country for shares ...
  5. American Depositary Share - ADS

    A U.S. dollar-denominated equity share of a foreign-based company ...
  6. International Depository Receipt ...

    A negotiable certificate issued by a bank representing ownership ...
RELATED FAQS
  1. 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 Full Answer >>
  2. 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 Full Answer >>
  3. 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 Full Answer >>
  4. 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 Full Answer >>
  5. What does a positive capital account balance mean?

    A positive capital account balance indicates that more money is flowing into, rather than out of, a country. A country's ... Read Full Answer >>
  6. What does a negative balance in the capital account mean?

    A negative capital account balance indicates a predominant money flow outbound from a country to other countries. The implication ... Read Full Answer >>
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. Fundamental Analysis

    Can You Invest in China's Huawei?

    Have you heard of giant Chinese telecom maker Huawei? Here's what you need to know.
  8. Investing

    Too Late To Invest In EM?

    Investors have flocked to developing markets amid continued low U.S. interest rates & hopes of further economic stimulus from emerging world central banks.
  9. Mutual Funds & ETFs

    Top Foreign Debt ETFs & Funds for Diversification

    Foreign fixed income options for investors seeking capital preservation and diversification
  10. Economics

    Understanding Green Field Investments

    A green field investment refers to a company, usually a large multi-national corporation, building a new facility in a foreign country.

You May Also Like

Hot Definitions
  1. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  2. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  3. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  4. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  5. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
  6. Rule Of 70

    A way to estimate the number of years it takes for a certain variable to double. The rule of 70 states that in order to estimate ...
Trading Center