American Depositary Receipt (ADR)

Understanding American Depositary Receipts (ADRs): A Comprehensive Guide

American Depositary Receipts (ADRs) are a vital tool for U.S. investors seeking exposure to foreign markets. In this guide, we delve into what ADRs are, how they work, their types, advantages, disadvantages, pricing, history, and real-world examples.

What Is an American Depositary Receipt (ADR)?

An American depositary receipt (ADR) represents shares of a foreign company traded on U.S. stock exchanges. It allows American investors to access overseas markets conveniently.

Key Takeaways

ADRs are certificates issued by U.S. depositary banks, representing foreign company shares.
Traded on U.S. exchanges, ADRs offer liquidity and ease of access to international markets.
Dividends and prices of ADRs are quoted in U.S. dollars.
While ADRs facilitate global investment, they may subject investors to double taxation and have limited options.

How American Depositary Receipts (ADRs) Work

ADRs simplify international investing by enabling transactions in U.S. dollars. They're priced and traded in the U.S., eliminating the need for currency exchange by investors.

Types of American Depositary Receipts

ADRs come in two categories: sponsored and unsponsored. Sponsored ADRs involve a legal arrangement between the foreign company and the U.S. bank, while unsponsored ADRs have no such formalities.

ADR Levels

Level I: Basic ADRs trading over-the-counter, with minimal SEC requirements.
Level II: ADRs listed on exchanges with increased SEC scrutiny.
Level III: Prestigious ADRs allowing public offerings on U.S. exchanges, subject to full SEC reporting.

American Depositary Receipt Pricing and Costs

ADRs may represent shares on a one-to-one basis or fractions thereof. Pricing closely tracks the company's stock value on its home exchange, while dividends and gains are in U.S. dollars.

Advantages and Disadvantages of American Depositary Receipts

ADRs offer easy access to international markets, portfolio diversification, and simplified trading. However, they may involve double taxation and limited company choices.

Advantages

Easy tracking and trading.
Available through U.S. brokers.
Denominated in dollars.
Offer portfolio diversification.

Disadvantages

Risk of double taxation.
Limited company selection.
Compliance issues with unsponsored ADRs.
Potential currency conversion fees.

History of American Depositary Receipts

ADRs emerged in the 1920s to address complexities in buying foreign shares. J.P. Morgan pioneered ADRs, facilitating global investment in companies like Selfridges and EMI.

Real-World Example of ADRs

Volkswagen's ADR transition from VLKAY to VWAGY in 2018 illustrates the dynamics of ADR programs and investor options during corporate changes.

FAQs about ADRs

If I Own an ADR Is It the Same as Owning Shares in the Company?
Not exactly. ADRs represent foreign shares but do not grant ownership rights like common stock.

Why Do Foreign Companies List ADRs?
Foreign companies seek ADR listings for international visibility and access to a broader investor base.

What Is a Sponsored vs. an Unsponsored ADR?
Sponsored ADRs involve collaboration between the depositary bank and the foreign company, while unsponsored ADRs lack direct company involvement.

What Is the Difference Between an ADR and a GDR?
ADRs represent shares in one market, while Global Depositary Receipts (GDRs) offer access to multiple markets with a single security.

Is an ADR the Same as an American Depositary Share (ADS)?
ADSs are the actual shares underlying the ADR, with each ADR representing a bundle of ADSs.