American Depositary Receipt (ADR)

An American Depositary Receipt (ADR) is a financial instrument issued by U.S. banks that allows domestic buyers to invest in foreign companies as a convenient substitute for direct ownership of stock.
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Overview

An American Depositary Receipt (ADR) is a negotiable certificate issued by a U.S. depository bank representing a specified number of shares—usually one share—of a foreign company’s stock. ADRs are traded on U.S. stock exchanges and over-the-counter (OTC) markets just like the stocks of domestic companies. ADRs allow U.S. investors to buy shares in foreign companies without the complexities of international transactions and currency conversions. The underlying stocks of ADRs are held in a foreign trust by the U.S. bank to ensure transparency and control.

Examples

  1. Alibaba Group Holding Limited (BABA): A Chinese multinational conglomerate holding company specializing in e-commerce, retail, Internet, and technology. Listed as an ADR on the NYSE.
  2. Samsung Electronics Co., Ltd. (SSNLF): A South Korean multinational electronics company. Its ADRs are traded OTC in the U.S.
  3. Nestlé S.A. (NSRGY): A Swiss multinational food and drink processing conglomerate corporation. Its ADRs are traded OTC in the U.S.

FAQ Section

1. What is the purpose of ADRs?

ADRs allow U.S. investors to diversify their portfolios globally by investing in foreign companies without engaging in complex international transactions and dealing with different currencies.

2. How are ADRs traded?

ADRs are traded on U.S. stock exchanges like the NYSE and NASDAQ, as well as in over-the-counter (OTC) markets.

3. What is an underlying share?

An underlying share is the actual share of a foreign company that an ADR represents. These shares are held in custody by a U.S. bank or a foreign branch of a U.S. bank.

4. Are ADR holders entitled to dividends?

Yes, ADR holders are entitled to dividends and other distributions on the underlying shares, although they are paid in U.S. dollars by the depository bank.

5. How does currency exchange impact ADRs?

The value of ADRs can be affected by fluctuations in the exchange rate between the U.S. dollar and the currency in which the underlying foreign shares are denominated.

  • American Depositary Shares (ADS): The shares that represent the foreign company’s stock, which are held on deposit by the U.S. bank.
  • Global Depositary Receipt (GDR): Similar to an ADR, but can be offered for sale globally through multiple markets including those outside the U.S.
  • International Financial Reporting Standards (IFRS): Accounting standards that have been globally recognized and are used by many companies listed as ADRs.

Online Resources

Suggested Books for Further Studies

  • “International Financial Statement Analysis” by Thomas R. Robinson, Elaine Henry, Wendy L. Pirate, Michael A. Broihahn - Focuses on the techniques used to analyze financial statements from an international perspective.
  • “ADR’s Regulation and the U.S. Securities Markets” by Allan Sloan - Detailed exploration of the regulations and markets for ADRs.
  • “The Financial Times Guide to Understanding Finance” by Javier Estrada - Covers international finance principles and includes sections discussing instruments like ADRs.

Fundamentals of American Depositary Receipts: International Business Basics Quiz

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American Depositary Receipt (ADR)
American Depositary Receipt (ADR)