Depositary Receipt

What is a 'Depositary Receipt'

A depositary receipt is 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.

BREAKING DOWN '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. European Depository Receipt - EDR

    A negotiable security (receipt) that is issued by a European ...
  2. Government Depository

    Libraries through the United States and its territories where ...
  3. Receipt

    A written acknowledgment that something of value has been transferred ...
  4. SEC Form F-6EF

    A filing with the Securities and Exchange Commission (SEC), also ...
  5. Y

    A letter that appears on a Nasdaq stock symbol specifying that ...
  6. Sponsored ADR

    An American depositary receipt (ADR) issued by a bank on behalf ...
Related Articles
  1. Investing

    How To Trade Foreign Stocks

    We weigh the major ways to trade foreign stocks for investors.
  2. Budgeting

    Do You Need A Rent Receipt?

    Landlords don't always bother to send receipts to renters. But there are important reasons renters should insist on getting proof they paid their rent.
  3. Forex Education

    The 3 Biggest Risks Faced By International Investors

    Investing internationally is a great way to diversify your portfolio, but you need to know the risks.
  4. Options & Futures

    20 Investments: Conclusion

    Now that you have an idea of some of the places where you can invest your hard-earned dollar, we hope that you are on your way to making your money work for you. Here's a recap of the 20 investments ...
  5. Insurance

    Investing Beyond Your Borders

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

    ADR Basics: Introduction

    Globalization is the dissolution of barriers to trade and the tendency of the world's businesses to integrate customs and values. Globalization is making it increasingly easy to travel, correspond ...
  7. Stock Analysis

    VelocityShares Fills Pipeline

    Investors endured another slow trading week with mixed economic data releases on Wall Street, paving the way for another wave of profit-taking. As major equity indexes drifted sideways with a ...
  8. Mutual Funds & ETFs

    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.
  9. Mutual Funds & ETFs

    PID: An ETF Performance Case Study

    Explore the performance of the PowerShares International Dividend Achievers ETF since 2012 and the role that energy prices play in the fund's yearly returns.
  10. Taxes

    Tips To Make Next Year’s Taxes Less Stressful

    You might be ready to put the stress of tax preparation behind you until next season, but ignoring your personal tax situation for 11 months of the year is what got you into this mess. Find out ...
RELATED FAQS
  1. 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 >>
  2. Why would an investor want to hold an American Depository Receipt rather than the ...

    Learn about the advantages for investors of using American Depositary Receipts instead of investing directly in the underlying ... Read Answer >>
  3. 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 >>
  4. 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 >>
  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. Why would a company choose to use global depositary receipts (GDRs) for financing?

    Learn why a company might choose to utilize global depositary receipts for financing, along with the many other benefits ... Read Answer >>
Hot Definitions
  1. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  2. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  3. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center