An American depositary share (ADS) is a U.S. dollar-denominated equity share of a foreign-based company available for purchase on an American stock exchange. American Depositary Shares (ADSs) are issued by depository banks in the U.S. under agreement with the issuing foreign company. The entire issuance is called an American Depositary Receipt (ADR), and the individual shares are referred to as ADSs.
Depending on the level of compliance with U.S. securities regulations the foreign company wishes to follow, companies may either list its shares over-the-counter (OTC) with low reporting requirements or on a major exchange like The New York Stock Exchange (NYSE) or The NASDAQ Stock Market (Nasdaq). Listings on the latter exchanges generally require the same level of reporting as domestic companies and also require adherence to Generally Accepted Accounting Principles (GAAP) rules.
Foreign companies that choose to offer shares on U.S. exchanges gain the advantage of a wider investor base, which can also lower costs of future capital. For U.S. investors, ADSs offer the opportunity to invest in foreign companies without dealing with currency conversions and other cross-border administrative hoops.
Even though ADSs represent real claims to foreign shares and can be converted if an investor wished to do so, there is currency risk involved in holding them. Fluctuations in the currency exchange rate between the USD and the foreign currency will affect the price of shares as well as any income payments, which must be converted into U.S. dollars.
ADSs often represent more than one share of common stock. Further, these ADSs can gap up, or increase in price when no trading occurs. This is because trading may occur in the company's domestic country when trading hours are over in the United States, and if the stock trades well in the foreign markets, its SDS equivalent often opens in the U.S. with a sharp jump.
For example, Woori Bank, a bank headquartered in South Korea, is a subsidiary of Woori Financial Group and has ADSs that are traded in the United States. The bank has an ADS that is equal to three shares of common stock, and it gapped up in price by $0.03 on July 20, 2016. Technical analysis of the bank's ADS shows that two-thirds of the time its stock performance continues to increase after the gap up.
Using another example, China Online Education Group, 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.