ADR- American Depositary Receipt in Finance
It is a negotiable certificate that represents a specified number of shares of a foreign company’s stock and it is issued by a U.S. bank. American Depositary Receipts allow foreign companies to raise capital in the U.S. by making their shares available to American investors without having to comply with U.S. Securities and Exchange Commission (SEC) regulations.
ADRs are denominated in U.S. dollars and traded on U.S. stock exchanges, making it easy for American investors to buy and sell shares of foreign companies. ADRs also allow foreign companies to expand their shareholder base beyond their home country and potentially increase liquidity in their shares.
What is the full-form ADR in Finance?
ADR stands for American Depository Receipt which is a negotiable certificate issued by a U.S. bank that represents a specified number of shares of a foreign company’s stock. ADRs are designed to allow foreign companies to raise capital in the U.S. by making their shares available to American investors without having to comply with U.S. Securities and Exchange Commission (SEC) regulations.
What are the features of ADR?
You know that American Depository Receipts (ADRs) are certificates representing ownership in foreign companies that are tradable in the United States. Here some features are mentioned to understand it clearly-
- Dividend Payments: ADRs allow U.S. investors to receive dividend payments in U.S. dollars, which simplifies the process of receiving and reinvesting dividend payments.
- Liquidity: ADRs are traded on U.S. exchanges, which makes them more liquid and easier to buy and sell than the foreign shares themselves.
- Voting rights: ADRs may or may not come with voting rights, depending on the agreement between the foreign company and the depositary bank that issues the ADRs.
- Accessibility: ADRs make it easier for U.S. investors to invest in foreign companies without having to deal with the complexities of foreign markets and currencies.
- Disclosure: ADR issuers must comply with U.S. Securities and Exchange Commission (SEC) regulations, which require them to disclose financial information and other material events in a timely manner.
- Currency Risk: Since ADRs are denominated in U.S. dollars, investors may be exposed to currency risk if the foreign currency depreciates against the U.S. dollar.
- Custodial fees: ADR investors may incur fees for custodial services provided by the bank or broker that holds the ADRs on their behalf.
What are the benefits and losses of ADR?
Here is the table showing the benefits and losses of ADR (American Depositary Receipt)-
|1||Easier access to foreign companies for US investors||Exposure to currency risk|
|2||Simplified dividend payments in US dollars||Custodial fees|
|3||Increased liquidity compared to foreign shares||May not have voting rights|
|4||Compliance with US SEC regulations for disclosure||Higher fees than investing in local stocks|
|5||Reduced paperwork for US investors||Limited investment options compared to local markets|
|6||Diversification benefits by investing in foreign markets||Potential lack of transparency and corporate governance|
|7||Reduced political risk compared to investing directly||Potential lack of access to foreign markets in times of crisis|
|8||Allows for easier comparison between foreign companies||Potential for lack of liquidity during market volatility|
How do American Depositary Receipts work?
Here is the table showing steps to know how ADR works-
|No.||Steps||Descriptions of steps|
|1||Foreign company issues shares||The foreign company issues shares on its local stock exchange.|
|2||Depositary bank purchases shares||The depositary bank buys shares of the foreign company on the local stock exchange.|
|3||Depositary bank issues ADRs||The depositary bank issues ADRs that represent the shares it has purchased. Sponsored ADRs are issued with the cooperation and involvement of the foreign company, while unsponsored ADRs are issued without the involvement or approval of the foreign company.|
|4||ADRs are listed on the US stock exchange||The ADRs are listed and traded on a US stock exchange, such as the NYSE or NASDAQ.|
|5||US investors buy and sell ADRs||US investors can buy and sell ADRs just like any other US-listed stock.|
|6||A depositary bank handles dividends||When the foreign company pays dividends to its shareholders, the depositary bank receives the dividends in the local currency and converts them into US dollars to pay out to the ADR holders.|
|7||The depositary bank handles voting rights and corporate actions||The depositary bank handles administrative tasks, such as voting rights and corporate actions, on behalf of the ADR holders.|
What are the types of ADRs?
These are the two types of American Depositary Receipts-
|1.||Sponsored ADRs||Sponsored ADRs are issued with the cooperation and involvement of foreign companies. The foreign company appoints a depositary bank to manage the ADR program, and the ADR holders have access to the company’s investor relations information and financial statements. Sponsored ADRs also typically have voting rights, allowing ADR holders to vote on matters such as board elections and significant corporate actions. Sponsored ADRs can be listed on a US stock exchange, such as the NYSE or NASDAQ, or traded in the over-the-counter (OTC) market.|
|2.||Unsponsored ADRs||Unsponsored ADRs are issued without the involvement or approval of the foreign company. Instead, a depositary bank purchases shares of the foreign company on the local stock exchange and issues ADRs to represent those shares. Unsponsored ADRs do not have access to the foreign company’s investor relations information or financial statements and typically do not have voting rights. Unsponsored ADRs can only be traded in the over-the-counter (OTC) market and may have lower liquidity compared to sponsored ADRs listed on a US stock exchange.|
What is the difference between ADR and GDR?
These are some differences between ADR(American Depositary Receipt) and GDR (Global Depositary Receipt) which are listed in the table below-
|Full form||American Depositary Receipt||Global Depositary Receipt|
|Definition||ADRs are issued by a US-based depositary bank for a foreign company’s shares. The ADRs trade on a US stock exchange.||GDRs are issued by a depositary bank for a foreign company’s shares. The GDRs trade on an international stock exchange, such as the London Stock Exchange or Luxembourg Stock Exchange.|
|Currency||ADRs are denominated in US dollars.||GDRs can be denominated in various currencies, such as US dollars, euros, or British pounds.|
|Market||ADRs are listed on a US stock exchange, such as the NYSE or NASDAQ.||GDRs are listed on an international stock exchange, such as the London Stock Exchange or Luxembourg Stock Exchange.|
|Regulations||ADRs are subject to US securities laws and regulations.||GDRs are subject to securities laws and regulations in the country where they are listed.|
|Investor Access||ADRs allow US investors to invest in foreign companies listed on a US stock exchange.||GDRs allow investors to invest in foreign companies listed on an international stock exchange.|
|Investment Minimum||ADRs typically have a low investment minimum, making them accessible to individual investors.||GDRs typically have a high investment minimum, making them more suitable for institutional investors.|
|Market Liquidity||ADRs typically have high liquidity due to a large number of investors and the depth of the US stock market.||GDRs may have lower liquidity compared to ADRs due to trading restrictions and lower trading volumes in some international markets.|
|Trading Hours||ADRs trade during US market hours.||GDRs trade during the market hours of the international stock exchange where they are listed.|
What are the prices and costs of ADR?
Investing in American Depository Receipts (ADRs) can involve various pricing and cost considerations, including the ADR price, conversion costs, depositary fees, withholding taxes, and brokerage commissions.
Here are the prices and costs of American Depositary Receipts-
- ADR Price: The price of an ADR is typically based on the price of the underlying foreign shares, adjusted for the ratio of ADRs per share. The ADR price can also be affected by other factors such as supply and demand, currency exchange rates, and market conditions.
- Conversion Costs: When purchasing or selling ADRs, investors may incur conversion costs to convert their local currency to US dollars for the ADR purchase. Similarly, when selling ADRs, investors may incur fees to convert their ADR proceeds back to their local currency.
- Depositary Fees: Depositary banks that issue ADRs typically charge fees for their services, which can include ADR setup fees, custody fees, and transaction fees.
- Withholding Taxes: Foreign governments may withhold taxes on dividends paid to ADR holders, which can reduce the amount of dividends received by the investor. However, many countries have tax treaties with the US that reduce or eliminate withholding taxes for US investors.
- Brokerage Commissions: Investors may also incur brokerage commissions when buying or selling ADRs. These commissions can vary depending on the investor’s brokerage, the size of the transaction, and other factors.
It’s important for investors to carefully consider these pricing and cost considerations before investing in ADRs to ensure they have a clear understanding of the potential expenses involved.
Are there any tax implications to investing in ADRs?
Yes, foreign governments may withhold taxes on dividends paid to ADR holders, which can reduce the value of dividends received by the investor. However, many countries have tax treaties with the US that reduce or eliminate withholding taxes for US investors.
What are ADR stocks?
An American Depository Receipt (ADR) is a type of security that represents ownership of shares in a foreign company that trades on a US stock exchange. ADRs are created by US depositary banks, which purchase the foreign company’s shares and then issue the ADRs on a US exchange. ADRs make it easier for US investors to invest in foreign companies without having to navigate foreign markets or currencies.
Faqs on ADR (American Depositary Receipt)
ADR stands for American Depositary Receipt.
ADRs are created to make it easier for US investors to invest in foreign companies without having to navigate foreign markets or currencies.
Investing in ADRs carries many of the same risks as investing in any stock, including market volatility and the risk of loss. Additionally, ADRs can be subject to currency fluctuations and political risks specific to the foreign country in which the company operates.
Investors can invest in ADRs through a brokerage account. They should carefully consider the risks and costs involved before investing and do their due diligence to understand the foreign company and its operations.