ADR (American Depositary Receipt)
An ADR is a certificate issued by a U.S. bank representing shares in a foreign company, allowing American investors to buy foreign stocks on U.S. exchanges in U.S. dollars without dealing with foreign exchanges or currencies.
🎬 Video Explanation
Exam Tip
ADR = foreign stock on U.S. exchange in USD. Level I = OTC. Levels II/III = major exchanges. Currency risk still applies!
What is an ADR?
An American Depositary Receipt (ADR) is a negotiable certificate issued by a U.S. depositary bank that represents shares of a foreign company's stock. ADRs trade on U.S. exchanges in U.S. dollars, making it easy for American investors to invest in foreign companies.
How ADRs Work
| Step | Description |
|---|---|
| 1 | Foreign company deposits shares with a custodian bank abroad |
| 2 | U.S. depositary bank issues ADRs representing those shares |
| 3 | ADRs trade on U.S. exchanges (NYSE, NASDAQ, OTC) |
| 4 | Dividends are converted to U.S. dollars and paid to ADR holders |
ADR Levels
| Level | Description | SEC Registration | Exchange |
|---|---|---|---|
| Level I | Minimal requirements | Exempt | OTC only |
| Level II | Full SEC reporting | Form 20-F | NYSE, NASDAQ |
| Level III | Can raise capital | Full registration | NYSE, NASDAQ |
| 144A | Private placement | Limited | QIBs only |
ADR Ratio
ADRs don't always represent a 1:1 ratio with foreign shares:
- 1 ADR = 1 foreign share
- 1 ADR = 10 foreign shares
- 10 ADRs = 1 foreign share
This is adjusted to keep ADR prices in a "normal" trading range.
Benefits of ADRs
| Benefit | Explanation |
|---|---|
| Convenience | Trade during U.S. market hours |
| Currency | Priced and pay dividends in USD |
| Familiarity | Trade on U.S. exchanges |
| Settlement | Standard U.S. settlement (T+1) |
| Diversification | Access to international markets |
Risks of ADRs
| Risk | Description |
|---|---|
| Currency Risk | Exchange rate fluctuations affect returns |
| Political Risk | Foreign government instability |
| Information Risk | Less transparency for some companies |
| Fees | Custodian fees may apply |
ADR vs. Ordinary Shares
| Factor | ADR | Ordinary (Foreign) Shares |
|---|---|---|
| Trading Location | U.S. exchanges | Foreign exchanges |
| Currency | USD | Local currency |
| Trading Hours | U.S. hours | Foreign hours |
| Custody Fees | Yes (small) | No |
Popular ADR Examples
- Toyota (TM)
- Alibaba (BABA)
- Novartis (NVS)
- Sony (SONY)
- BHP Group (BHP)
Exam Alert
ADRs allow U.S. investors to buy FOREIGN stocks on U.S. exchanges in USD. Know the 3 levels and that currency risk still applies. Sponsored ADRs have company involvement; unsponsored do not.
Study This Term In
Related Terms
Common Stock
Common stock is a security representing ownership in a corporation, giving shareholders voting rights and potential dividends.
Exchange Rate Risk (Currency Risk)
Exchange rate risk is the potential for loss when the value of investments fluctuates due to changes in currency exchange rates between countries.