What Is an American Depositary Share (ADS)?
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.
Understanding American Depositary Shares (ADS)
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.
- American Depositary Shares (ADS) refers to individual shares offered by foreign companies on a US exchange.
- Benefits of ADS for the companies include access to a wider investor base and the world's most sophisticated financial marketplace.
- The main drawback of ADS for investors is that there is a currency risk in holding them and any income payments must be converted into US dollars.
Benefits of ADSs
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.
Downside of ADSs
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. Tax treatment of dividends from ADSs is also different. Most countries apply a withholding amount on dividends issued for ADRs. This withholding amount can vary between jurisdictions. For example, Chile and Switzerland withhold 35% witholding tax while France can withhold as much as 75% of the tax on dividends, in case on non-cooperative countries within the EU. The withholding tax is in addition to the dividend tax already levied by US authorities. The dividend tax can be avoided by ADR investors by filling out Form 1116 for foreign tax credit.
Real World Examples of ADSs
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. A technical analysis of the price action on this ADS shows that for the past decade, its price continued higher two-thirds of the time after a 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.