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

American Depositary Receipts (ADRs) are stocks that trade in the U.S. but represent a specified number of shares in a foreign corporation – such as Alibaba (BABA).  Like regular stocks, ADRs are bought and sold on U.S. markets. They also trade in U.S. dollars and clear through U.S. settlement systems – allowing ADR investors to avoid transacting in a foreign currency.  

ADRs were developed because of the complexities involved in buying shares in foreign countries and the difficulties associated with trading at different prices and currency values. ADRs allow U.S. banks to  purchase a bulk lot of shares from a foreign company, bundle the shares into groups and reissue them on U.S. stock markets – namely, the New York Stock Exchange and NASDAQ.

J.P. Morgan’s (JPM) predecessor firm Guaranty Trust Co. pioneered the ADR concept. In 1927, it created and launched the first ADR, enabling U.S. investors to buy shares of famous British retailer Selfridges and helping the luxury depart store tap into global markets. The ADR was listed on the New York Curb Exchange (the precursor to the American Stock Exchange). A few years later, in 1931, the bank introduced the first sponsored ADR for British music company Electrical & Musical Industries (also known as EMI), the eventual home of the Beatles. Today, J.P. Morgan and another U.S. bank – BNY Mellon – continue to be actively involved in the ADR markets. (For more, see: J.P. Morgan Biography.)

Sponsored and Unsponsored

ADRs can be sponsored or unsponsored. With sponsored ADRs, the foreign company enters into an agreement directly with the U.S. depositary bank to make plans for recordkeeping, distribution of shareholder communications, payment of dividends (some ADRs are dividend-paying stocks) and other services. Sponsored ADRs can be listed on major exchanges.

An unsponsored ADR, on the other hand, is set up without the cooperation of the foreign company. These ADRs may be initiated by a broker-dealer that wants to establish a U.S. trading market. The number of unsponsored ADRs skyrocketed in 2008 after the SEC amended an exemption that applied to foreign issuers. The amendment got rid of the written application and paper submission requirements by providing automatic exemption to foreign issuers that meet certain conditions. This makes it possible for non-U.S. companies to have their securities traded in the U.S. OTC market without the registration previously required under the Securities and Exchange Commission Act of 1934. Note that unsponsored ADRs can only trade on over-the-counter markets.

Either way, an ADR may not be established unless the foreign company is either subject to the reporting requirement under the Securities and Exchange Act of 1934 or exempt under the Act. 

ADR Levels

ADRs are generally categorized into three levels, depending on the extent to which the foreign company has accessed the U.S. markets:

  • Level I - This is the most basic type of ADR where foreign companies either don't qualify or don't want to have their ADR listed on an exchange. This type of ADR can be used to establish a trading presence but not to raise capital. Level I ADRs are found only on the over-the-counter market have the loosest requirements from the Securities and Exchange Commission (SEC)  – and they are typically highly speculative. While they are riskier for investors than other types of ADRs, they are an easy and inexpensive way for a foreign company to gauge interest for its securities in the U.S.
  • Level II – Like Level I ADRs, Level II ADRs can be used to establish a trading presence on a stock exchange, and they can’t be used to raise capital. Level II ADRs have slightly more requirements from the SEC than do Level I ADRs, but they get higher visibility and trading volume.  
  • Level III – Level III ADRs are the most prestigious of the three ADR levels. With these, an issuer floats a public offering of ADRs on a U.S. exchange. They can be used to establish a substantial trading presence in the U.S. financial markets and raise capital for the foreign issuer. They are subject to full reporting with the SEC.

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 administrative costs and avoiding foreign taxes on each transaction. Foreign entities like ADRs because they allow non-U.S. companies to gain more U.S. exposure, allowing them to tap into the wealthy U.S. equities markets. (For more, see: Investing Beyond Your Borders.)


ADR Basics: Determining Price
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

    How To Trade Foreign Stocks

    We weigh the major ways to trade foreign stocks for investors.
  3. Investing

    Investing Beyond Your Borders

    Investing abroad poses risks, but can also help you diversify. Discover ways to invest in foreign stocks.
  4. 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.
  5. 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.
  6. Investing

    Top Indian Stocks For American Investors

    American investors looking to diversify their portfolio to include Indian stocks can do so easily by purchasing shares ADRs of Indian stocks.
  7. Insights

    SEC Subpeonas 4 Banks in ADR Investigation: Report

    As if the big banks haven't gotten into enough regulatory hot water over the past few years, a clutch of major financial institutions are being investigated by the Securities and Exchange Commission ...
  8. Investing

    3 Actively Managed ETFs Worth the Cost (EMLP, AADR)

    Learn about the strategies and investments of three actively managed ETFs that are expensive but have produced excellent risk-adjusted returns.
  9. Insights

    Interested In Brazilian Stocks? Here Are The Top ADRs

    American investors looking to add Brazilian stocks to their portfolios can do so by purchasing shares of American Depository Receipts (ADRs).
Frequently Asked Questions
  1. What Is a Holistic Marketing Strategy?

    Understand what holistic marketing is, and learn how the components of this strategy work when applied to different business ...
  2. What's the First Stock Warren Buffett Ever Bought?

    Find out about Warren Buffett's first experience in stock market trading. Learn some of the Berkshire Hathaway CEO's basic ...
  3. When Is a Put Option Considered to Be 'in the Money?'

    Learn about put options, how these financial derivatives work and when put options are considered to be in the money related ...
  4. What Are Some of the Top Hostile Takeovers of All-Time?

    Learn about some of the most noteworthy hostile takeovers in history, including the KKR acquisition of RJR Nabisco and the ...
Trading Center