Loading the player...

What is an 'American Depositary Receipt - ADR'

An American depositary receipt (ADR) is a negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas, and holders of ADRs realize any dividends and capital gains in U.S. dollars, but dividend payments in euros are converted to U.S. dollars, net of conversion expenses and foreign taxes. ADRs are listed on either the NYSE, AMEX or Nasdaq but they are also sold OTC.

BREAKING DOWN 'American Depositary Receipt - ADR'

American depositary receipts were introduced in 1927 as an easier way for U.S. investors to purchase stock in foreign companies. Non-U.S. companies also benefit from ADRs as it makes it easier to attract American investors.

Before ADRs existed, if American investors wanted to purchase shares of a non-U.S. listed company, they had to buy the shares on international exchanges. Purchasing shares on international exchanges has potential drawbacks, particularly currency exchange issues and regulatory differences. Publicly traded companies have to answer to regulatory bodies with jurisdiction over their country. In the United States, the regulatory body is the Securities Exchange Commission (SEC), which works to protect investors. The regulatory bodies implement and enforce rules on companies including how companies should present pertinent financial information. Before investing in an internationally traded company U.S. investors had to familiarize themselves with the different rules, or they could risk misunderstanding important information such as the company's financials.

Benefits

ADR holders do not have to transact in foreign currencies because ADRs trade in U.S. dollars and clear through U.S. settlement systems. The U.S. banks require that the foreign companies provide them with detailed financial information, making it easier for investors to assess the company's financial health compared to a foreign company that only transacts on international exchanges.

Trading ADRs

To offer ADRs, U.S. banks simply purchase shares from the international company and reissue them, typically on U.S. exchanges. An ADR may represent the underlying shares on a one-for-one basis, or it may represent a fraction of a share or multiple shares. The depositary bank sets the ratio of U.S. ADRs per home-country share at a value that is appealing to investors. If an ADR’s value is too high, it could deter some investors, but if it is too low, investors may think they are like riskier penny stocks.

Examples

Numerous companies trade in the United States as ADRs. For example, Volkswagen trades OTC under the ticker VLKAY. BP Plc. trades on the NYSE under the ticker BP.

RELATED TERMS
  1. Depositary Receipt

    A negotiable financial instrument issued by a bank to represent ...
  2. Global Registered Share

    A share issued and registered in multiple markets around the ...
  3. American Depositary Share - ADS

    A U.S. dollar-denominated equity share of a foreign-based company ...
  4. Linkage

    Linkage refers to the ability to buy a security on one financial ...
  5. Chinese Depositary Receipt - CDR

    A Chinese Depositary Receipt (CDR) is a depositary receipt traded ...
  6. China ETF

    Exchange-traded funds that invest in and track the equity stakes ...
Related Articles
  1. Investing

    Investing in foreign stocks: ADRs and GDRs

    Depositary Receipts such as ADRs and GDRs are easy ways to invest in foreign stocks regardless of what part of the world you live in.
  2. Investing

    An Introduction To Depositary Receipts

    Learn about depositary receipts, which are securities that allow you to invest in a foreign company through your local exchange.
  3. Financial Advisor

    Introduction To American Depository Receipts ADRs

    ADRs can open up a whole new world for investors. Find out what they are and how they work.
  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

    Playing It Safe in Foreign Stock Markets

    Find out some of the lower-risk ways to invest in foreign markets.
  6. 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.
  7. Investing

    Dollar's Plunge Set to Boost Stocks, Gold, Oil

    Money Tree: A falling dollar could bolster stocks, oil, gold and other assets
RELATED FAQS
  1. What are the differences between Levels I, II, and III American Depository Receipts ...

    Understand the difference between sponsored American depositary receipts categorized within Level I, II or III. Read Answer >>
  2. What are the differences between global depositary receipts (GDRs) and American depositary ...

    Discover some of the similarities and differences between global depositary receipts and American depositary receipts, and ... Read Answer >>
  3. How Depository Banks Benefit From Issuing ADRs

    For investors, the benefits of investment exposure to foreign companies through ADRs is clear. Find out how custodial banks ... Read Answer >>
  4. Can stocks be traded on more than one exchange?

    A stock can trade on any exchange on which it is listed. A company can list its shares on more than one exchange, in a dual ... Read Answer >>
Hot Definitions
  1. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  2. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  3. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  4. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  5. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  6. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
Trading Center