A:

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. Meanwhile, an American depositary share (ADS) is the actual U.S. dollar-denominated equity share of a foreign-based company available for purchase on an American stock exchange. 

What Is an ADR?

ADRs are issued by U.S. depositary banks, and each one represents one or more shares of a foreign stock, or a fraction of a share. When you own an ADR, you have the right to obtain the foreign equity it represents, although most U.S. investors find it easier to own the ADR.

For example, let's say that shares of CanCorp (a fictitious Canadian company) sell on the Toronto Stock Exchange for C$5.75 (US$5). A U.S. bank buys a number of shares and sells ADRs at a ratio of 2:1. Therefore, each ADR represents two shares of CanCorp and thus should sell for US$10.

ADRs are held in the vaults of the U.S. banks that issue them. However, the shares they represent are actually held in the home country of the foreign-based corporation by a representative of the U.S. depositary bank. ADRs simplify the process of exchanging foreign shares: since it is only the receipts that are traded, investors do not need to worry about any exchange rate differences or the need to open special brokerage accounts.

Furthermore, ADRs entitle investors to all dividends and capital gains.

What Is an ADS?

An ADS, on the other hand, is the actual underlying share that the ADR represents. In other words, the ADS is the actual share trading, while the ADR represents a bundle of ADSs.

For example, if a U.S. investor wanted to invest in CanCorp, the investor would need to go to their broker and purchase a number of ADRs that are equal to the amount of CanCorp shares that they want. In this case, the ADRs are the receipts that the investor has to purchase, whereas the ADSs represent the underlying shares (CanCorp) that were invested in.

In another example, China Online Education Group (COE), a provider of online English language education services in China, has ADS that represents 15 class A ordinary shares. The company issued 2,400,000 ADS on the NYSE in its public offering on June 10, 2016.

(To learn more, see our ADR Basics Tutorial and "What Are Depositary Receipts?")

RELATED FAQS
  1. Does a Company's American Depositary Share Equal One Share of Common Stock?

    American depositary shares (ADS) are issued when a foreign company asks to trade its shares on an American exchange. Here's ... Read Answer >>
  2. How do level I, level II, and level III ADRs differ?

    Understand the difference between sponsored American depositary receipts (ADRs) categorized within level I, II or III. Find ... Read Answer >>
Related Articles
  1. Investing

    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. Investing

    American Depositary Receipt Basics

    Thanks to American depositary receipts, investors now have a world of investing opportunities to choose from.
  3. Investing

    How To Trade Foreign Stocks

    We weigh the major ways to trade foreign stocks for investors.
  4. Insights

    Ever Wanted to Own International Stocks? Here's How

    Tips and strategies for users to trade in different exchanges around the world.
  5. Investing

    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.
  6. Investing

    Playing It Safe in Foreign Stock Markets

    Find out some of the lower-risk ways to invest in foreign markets.
  7. Investing

    MSCI Just Made Investing in China Easier

    Investment research firm MSCI Inc. announced Monday that it would include American Depository Receipts (ADRs) of Chinese companies in its Emerging Market Index.
  8. Investing

    How U.S Investors Can Buy Nintendo Stock (NTDOY)

    Those who wish to buy stock in Nintendo due to the success of the Nintendo Switch can do so on U.S. exchanges. Find out how.
RELATED TERMS
  1. Unsponsored ADR

    An unsponsored ADR is an American depositary receipt (ADR) that ...
  2. Global Registered Share (GRS)

    A global registered share (GRS, or Global Share) is a security ...
  3. Flowback

    Flowback describes a sell-off of cross-listed shares by foreign ...
  4. European Depositary Receipt - EDR

    European depositary receipt is a negotiable security issued by ...
  5. Linkage

    Linkage is the ability to buy a security on one financial exchange ...
  6. American Shares

    American shares is a term used outside of the United States to ...
Trading Center