ADR Basics: What Is An ADR?
AAA
  1. ADR Basics: Introduction
  2. ADR Basics: What Is An ADR?
  3. ADR Basics: Determining Price
  4. ADR Basics: Risks
  5. ADR Basics: Conclusion

ADR Basics: What Is An ADR?


Introduced to the financial markets in 1927, an American depositary receipt (ADR) is a stock that trades in the United States but represents a specified number of shares in a foreign corporation. ADRs are bought and sold on American markets just like regular stocks, and are issued/sponsored in the U.S. by a bank or brokerage.

ADRs were introduced as a result of the complexities involved in buying shares in foreign countries and the difficulties associated with trading at different prices and currency values. For this reason, U.S. banks simply purchase a bulk lot of shares from the company, bundle the shares into groups, and reissues them on either the New York Stock Exchange (NYSE), American Stock Exchange (AMEX) or the Nasdaq. In return, the foreign company must provide detailed financial information to the sponsor bank. The depositary bank sets the ratio of U.S. ADRs per home-country share. This ratio can be anything less than or greater than 1. This is done because the banks wish to price an ADR high enough to show substantial value, yet low enough to make it affordable for individual investors. Most investors try to avoid investing in penny stocks, and many would shy away from a company trading for 50 Russian roubles per share, which equates to US$1.50 per share. As a result, the majority of ADRs range between $10 and $100 per share. If, in the home country, the shares were worth considerably less, then each ADR would represent several real shares.

There are three different types of ADR issues:

  • Level 1 - This is the most basic type of ADR where foreign companies either don't qualify or don't wish to have their ADR listed on an exchange. Level 1 ADRs are found on the over-the-counter market and are an easy and inexpensive way to gauge interest for its securities in North America. Level 1 ADRs also have the loosest requirements from the Securities and Exchange Commission (SEC).

  • Level 2 - This type of ADR is listed on an exchange or quoted on Nasdaq. Level 2 ADRs have slightly more requirements from the SEC, but they also get higher visibility trading volume.

  • Level 3 - The most prestigious of the three, this is when an issuer floats a public offering of ADRs on a U.S. exchange. Level 3 ADRs are able to raise capital and gain substantial visibility in the U.S. financial markets.

The advantages of ADRs are twofold. For individuals, ADRs are an easy and cost-effective way to buy shares in a foreign company. They save money by reducing administration costs and avoiding foreign taxes on each transaction. Foreign entities like ADRs because they get more U.S. exposure, allowing them to tap into the wealthy North American equities markets.

ADR Basics: Determining Price

  1. ADR Basics: Introduction
  2. ADR Basics: What Is An ADR?
  3. ADR Basics: Determining Price
  4. ADR Basics: Risks
  5. ADR Basics: Conclusion
RELATED TERMS
  1. Optimal Currency Area

    The geographic area in which a single currency would create the ...
  2. European Sovereign Debt Crisis

    A period of time in which several European countries faced the ...
  3. Welfare Capitalism

    Definition of welfare capitalism.
  4. Foreign remittance

  5. Bid Wanted

    An announcement by an investor who holds a security that he or ...
  6. Heckscher-Ohlin Model

    An economic theory that states that countries export what they ...
  1. What is the relationship between current yield and yield to maturity (YTM)?

    Learn about the relationship between a bond's current yield and its yield to maturity, including how the market price of ...
  2. What is the difference between issued share capital and subscribed share capital?

    Find out about the difference between subscribed share capital and issued share capital, including an explanation of the ...
  3. Should investors focus more on the current yield or face value of a bond?

    Find out when investors should focus on a bond's current yield versus its face value, including an example of how current ...
  4. How do I calculate the expected return of my portfolio in Excel?

    Find out how to calculate the total expected annual return of your portfolio in Microsoft Excel using the value and return ...

You May Also Like

Related Tutorials
  1. Bonds & Fixed Income

    Investing For Safety and Income Tutorial

  2. Investing Basics

    Stock Basics Tutorial

  3. Options & Futures

    Beginner's Guide To Trading Futures

  4. Trading Strategies

    Introduction To Order Types

  5. Options & Futures

    Options Pricing

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!